Flashcards in Term 2 Deck (100):
What is the labour growth effect?
How capital grows due to labour
n=pop growth rate
What is output and capital per capita in the steady state?
y*=A^1/1-a * (s/d+n)^a/1-a
What are the 4 endogenous growth models?
Learning by doing
Human Capital Accumulation
Research and Development Model
Government Spending Model
Discuss Learning by doing
Put into production function, take Logs of MPK
Discuss the possible values of a+b?
<1 growth slows to zero
>1 explosive growth
1 constant growth
What is the AK growth model?
Occurs where a+b=1 therefore constant growth
Discuss Human Capital Accumulation
U is proportion of hours worked
As (a-1)<0 and (1-a)>0 Increasing the growth rate of capital will not improve MPK but it will grow regardless
Discuss R and D model of growth?
Ly is production time
As (a-1)<0 and (1-a)>0 Increasing the growth rate of capital will not improve MPK but it will grow
Discuss the Infrastructure and Growth Model
Replace G with budget constraint
Sub in law of motion capital K*=s(1-t)Y
Find optimal level of taxation
Diff and solve for T
Assess the endogenous growth models?
Cannot decompose growth in this way
What about growth before industrialisation
Researches has increased over last 50 years with a constant growth rate
Barro Model does not consider congestion effects of public capital
What is solow swan convergence?
Poor countries will grow faster
How do you calcualte the beta for beta convergence
a- power of capital
What is a poverty trap?
If countries have a low savings rate, they lill converge to a lower steady state
What is conditional convergence?
Countries converge to their own steady state, regardless of growth rates
What does empirical evidence say?
We do not see unconditional convergence
Does occur for simlar countries
What is secular Stagnation?
Weak recovery of advanced economies after the financial crisis
Due to 0LB
Why is supply side causing secular stagnation?
Lower Levels of A due to reduced innovation and diminishing returns to ICT
Why is demand side causing secular stagnation
Investment is low
What is absolute and relative inequality?
Absolute is a difference
Relative is a ratio
What is the gini coefficent?
The area between the line and lorenz over the rest
1 is perfect inequality
What is the skill preimum paid to skilled labourers dependant on?
What is the kuznets curve?
Inequality will first increase, then decrease
Is growth good or bad for inequality?
Good: As MPS is higher for rich individuals, inequality causes growth
Bad: Empirical Evidence
What is pickettys view of inequality and growth?
IF IR>Growth, inequality will increase forever
What is the lifetime accounts table?
When young, C+S=Y
When Old: C=s(1+r)+y
What is the lifetime budget constraint?
Consumption + discounted consumptio = income + discounted income
How do you determine the euler equation?
FOC of lagrangian
What is an intertemoral consumption graph?
Looks like normal utility
Slope of budget constraint: -MRT
Slope of IC: -MRS
Discuss the effects of an increase in R?
Sub Effect: A-B
A rise in R causes an increase in the Opp Cost of C1 over C2
Weatlh Effect: B-C
R Rising increases C in both periods
C2 increases, C1 Falls
What is fishers income smoothing?
People smooth income over life by borrowing and savning
What is Friedman permanent income hypothesis
Consumption is just a fraction of life time income
What is the life cycle hypothesis
Agents consume a constant fraction of lifetime wealth
How could we improve Euler?
Credit market Frictions
Buffer Stock Savings
What is Ricardian equivalence
If G increases, people will save for higher taxes
What is the Governments Lifetime consumption table?
When Young: G=T+B
When Old: G+B=T
Out = In
What is an individuals lifetime income with taxation?
Adding taxation to both periods has no effect on the euler equation and thus income
Why does Ricardian Equivalence not hold?
Failings of permanent income hypotthesis
The Government does not have a binding constraint as no final period
Agents do not know if tax cut is temp or perm
What is the effect of a permentant tax decrease?
If tax inctrease is permanent, it is same in both periods
Thus does not effect Euler equation, but the budget constraint shifts outwards
What is the effect of a credit market imperfection?
Thus savers consumption in later life is higher
What happens if you draw the savers and borrows budget constraint?
Point of intersection is the max utility without borrowing
The budget constraint becomes the inner lines
To left of point slope: -(1+r)
To the right: -(1+rb)
What happens if taxes are lowered in period one with market imperfections?
Consumers will increase consumption in P1
Thus A moves to right
What is the profit maximising level of investment?
What is the effect of a rise in the rental rate of capital r
Decrease in investment
What is Tobins Q
Measures the level of investmetn
Market Value of form / Replacement cost of capital
If positive, firms should increase investment
What are the costs of changing capital?
Large changes to capital stock cost more than small, thus only make small changes
What are thw two theories on the stock market?
Keynes Beauty Contest
Using tobins Q and stock market valuation, how is investment determind?
Theta is installation costs
Q is tobins
Investment increases when Q>1
Discuss residential investment?
Reflects the demand and supply for housing capital
Why do firms hold inventories?
Prevent missed sales
Provide an overview of the overlapping generations model?
Individuals live for two period's
P1-Born, consume, work and save, 1 child
P2 - Consume all savings and die
How can you determine the euler equation for the overlapping generations model?
Obtain FOC and equate
How do you calculate the steady state level of capital per capita?
k*=( (B(1-a)A) / (1+B)) ^(1/1-a
How does capital evolve over time?
If it is above k*, depreciation and pop growth will move us to 45 line
Discuss Altrusim in OLG models?
We can model transfers within and over generations
By leaving inheritance
What does the new classical business cycle consider?
What is the Lucas Critique?
If you define a models paramaters using data, the paramaters cannot be used if the data changes
Discuss the representative agent?
12 Hours in a day
Y = Consumption + investment
Normal capital depreciation
B is discount,
d is depreciation
a is exponent of capital
What is calibration?
Making small changes to the paramaters of the model to get it to match the data
What is the Lucas Ripping Model?
Compares the production function and demand for labour
If tech increases, shift PF up
This increases labour productivity raising demand
Size of shocks measured by solow residual
What is Solows opinion on the real business cycle?
It is a waste of time, as the solow residual is a measure of imprecisiness
Why might labour hoarding cause issues with the Solow Residual and Lucas Ripping Model?
In recession, firms keep on workers to avoid firing, this would be marked as a productivity regression
What are the problems with the Lucas ripping model?
Tech shocks do not exist
Labour is not sensitive to real wage
What is tautology, and how does it link to the lucas ripping model?
Not explaining only restating
Changes in output are caused by tech shocks which are measured by changes in output
What do the New Keynesians attack about the policy ineffectiveness proposition?
Based on 3 assumptions
They attack final 2 arguing price and wage stickiness
Why may firms fail to change prices?
There is a menu cost, thus they will not change prices if within band of inertia
What effect does the band of inertia have?
They will overset the price in expectation of future price rises
What is calvo pricing?
Projects the unwillingness of firms to change prices into the future
What is the formula for the New Keynesian Philips Curve?
Pit=Piet+1 + a^2Lamda / 1-a (yt-ye)
How does the NKPC differ from previous models?
Instead of being dependant on pervious rates, it is dependant on future rates
What is external consistency?
Model is microfounded with no assuptions
What is the NKPC empirical failure?
The expectation of a deflationary announcment causes NKPC to shift downwards before the anouncment
Causing a boom
Why is the NKPC not externally consistent?
It is based on the adhoc assumption that the probability to change prices is poisson distribution
What is the sticky information philips curve?
Some firms working with outdated information
What is the dynamic stochastic general equilbirium?
Model used by CB
Intertemporal IS Curve
How do the stochastic general equilbrium equations relate to our 3 equation model?
Taylor rule same
IS based on intertemporal consumption
NKPC v IAPC
IAPC creates involuntary unemployment
What are the two reasons DSGE does not work?
Post Keynesain Economics
What is the basis of complexity economics?
Instead of rational agent, simulate a economic with multiple differentiated agents
Why does representative agent rational expectations (RARE) fail?
A representative agent has no reason to trade with one another
How does inductive reasoning and bounded rationality interact
It allows us to establish how agents interact, solivng the model
What is the Bar problem?
A bar is only nice if it has less than 60 people
There is no best stratergy for deciding whether to go
Each agent has multiple different predictors, if they fail they get dropped
Why is the bar problem a complex and adaptive system?
Complex - No Repetition
Adaptive - Agents adjust as time progresses
What is Krugmans Coordination question?
x axis is % of retialers who stock bluray
y axis is % of households who have bluray
2 s Shaped curves
Two intercepts, one hgh and one low
Will converge to either
What happends if the % of households with bluray increases?
The S curve wil shift up, creating a boom
How does the Keynesian Cross and planned expenditure S interact?
Drawing a 45 degree line
3 Outcomes, 2 parellls are stable
Intersect is not
What is the limiation of the business cycle under this model?
It is limited to either a high or low equilbrium, too regular
What are the key points of Post Keynesian Economics?
What is the difference between risk and uncertainty?
Risk has prob
The future should be based on the repeatable past, with risk
How does ergodicity link to RE?
RE uses past information to predict the future
How does ergodicity explain the economy?
Subjective belief converges to objective as wrong people fial
What is a cruical decision?
A decision that is taken without relevance to the past, and makes the past irrelevant
What happens to RE if crucial decisions exist?
How do post kenyesians explain crucial decisions
Economic decisions are made considering fundamental uncertainity, creating liquidity preference
What is liquidity preference?
People hold a procautionary stock of cash due to fundamental uncertaintity
What is the problem with batering in the RARE model?
Both parties must have the others wants
What is the problem with liquid savings?
They do not create demand for other goods, unlike saving that leads to investment
What do liquid savings create?
Why do people hold money?
To create certainity
How does money create certainity?
Can set input contracts to lock price (sticky wages)