Introduction to Advanced Macroeconomic Analysis (IAMA)Lecture # 15 Introducing Money IAMA / Lecture #151Important Announcement! For thoseinterestedin applyingforProf. Uhlig´scourse"Quantitative Macroeconomicsand NumericalMethodsSeminar" (formerly„Quantitative Macroand NumericalMethodsII“). Thisblock seminarwill takeplaceApril 10 -13 and on Mo.., Apr. 24, name, e-mailaddress(orothercontact)andstudentnumberto SusannRöthkeno informationat / Lecture #1521
Summary•Reviewof last time•Strengthsand weaknessesof RBC models•Money: Whydoesitmatter?•Whatarethewaysof introducingmoneyto modern macroeconomicmodels?•Jeanne‘s(1998) modelIAMA / Lecture #153Review of Last Time•Finish RBC as an applicationof thestochasticgrowth modeland sourceof a newmethod(SDGE) approach•Solution methods: Eigenvaluedecomposition, methodof undeterminedcoefficients•Critiqueof theRBC approachto modelingbusinesscyclesIAMA / Lecture #1542
Studyingan approximationto theoptimum•First, find thesteadystate, usingthebehaviorof grandratiosas a guide•Next, log-linearizethemodelaroundthesteadystate(takea firstorder Taylor approximationof thenaturallogarithmof thebehavioralequationsand equationsof motionaroundtheirlongrunvalues)•Thusstudythedynamicbehaviorof thisapproximatedeconomyusingtoolsforlinear differenceequationsIAMA / Lecture #155Studyingan approximationto theoptimum•Oncean approximatedeconomyhas beenobtainedand expressedas an (expectational) linear differenceequationsystem, wewantto „solve“ itas asa functionof theshocks(„forcingvariables“)•Weconsideredtwowaysof doingthis: –Eigenvaluedecomposition–Methodof undeterminedcoefficients(guessand verify)Cˆ=ηˆC+ηtKKZˆtCZtIAMA / Lecture #1563
ResultsforRBC model•Itispossibleto generatecycleswithouta monetarysector(monetaryimpulses), withshiftsin technology only•Do thecyclesresemblethereal world? -AlthoughY, C, I arepositivelycorrelatedand relative varianceslineup prettywell-employmentnotvariable enoughrelative to wage / productivity-wage shareisconstant(!) / markupisconstant-persistenceof outputisad hoc; capitalnotsufficient IAMA / Lecture #157QuestionsfortheRBC model•Howseriouslyshouldwetaketheoptimalitypropertiesof themodel? •Whatarethewelfareimplicationsforpolicyinterventions?•Isunemploymentbest characterizedas voluntary?•Whataboutmoney?IAMA / Lecture #1584
Burns-Mitchell Diagrams, OECD Countries (8) IAMA / Lecture #159QuartersaroundpeakBurns-Mitchell Diagrams, OECD Countries (8) IAMA / Lecture #1510Quartersaroundpeak5
Burns-Mitchell Diagrams, OECD Countries (8) IAMA / Lecture #1511QuartersaroundpeakBurns-Mitchell Diagrams, OECD Countries (8) IAMA / Lecture #1512Quartersaroundpeak6
Burns-Mitchell Diagrams, Financial variables QuartersaroundpeakQuartersaroundpeakQuartersaroundpeakQuartersaroundpeakIAMA / Lecture #1513Burns-Mitchell Diagrams, Labor Market Variables QuartersaroundpeakQuartersaroundpeakQuartersaroundpeakQuartersaroundpeakIAMA / Lecture #15147
Summary: Strengthsof RBC model•C, I, and Y areall stronglyprocyclical•Var(I) > Var(Y) > Var(C)•Interestratesareprocyclical•Theoretically, thepropagationmechanismisclean •Evidencethatoutputvarianceisdueto shocksto money/interestratesislimitedIAMA / Lecture #1515Summary: Weaknessesof RBC model•Toolittle"persistence" / notenoughendogenouspropagation•Persistencederivesfromad hoc assumptionsabouttechnology•Investment toovolatile, consumptionand employmentnotenough(relative to MPL=realwage) forrealisticlaborsupply•No roleformoneyIAMA / Lecture #15168
3. Lastinglegacy: SDGE Approach•RBC contributionisabouta method(seeKing and Rebelo´schapteron RBC modelsin 1999 Handbookon Macroeconomics)•StochasticDynamicGeneral Equilibrium(SDGE) classof modelsistheleadingapproach•Linkageto Slutsky´sseminalpoint aboutimpulsesand propagationIAMA / Lecture #15174. Money: Whydoesitmatter? •Manymechanismspossible, butideaisalmostalwaysthesame•Prices arepredeterminedin moneytermswhensupplyof excessliquiditychanges(statevariable)•Prominent models:Cash-in-Advancemodels(CIA)Money in theUtility Function(MUF)Money velocitycostsin thebudgetconstraint(VC)LimitedParticipation(LP)IAMA / Lecture #15189
5. Jeanne‘s(1998) SDGE modelas an exampleof a modelwithstickypricesHowdoeshe do it? •Technology isconstantreturnsin labor, no capital•HouseholdshaveCES preferencesoverconsumptiongoodson theinterval[0,1]•Cash in advance(CIA) •Portfolio decisionwithmonetaryinjectionbefore•Payday: householdsholdingmoneyat theend of theday•Calvo (1983) pricesettingIAMA / Lecture #151910
