Transcript Chapter 11

Chapter 11
Market-Clearing
Models of the
Business Cycle
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Study Three Market-Clearing
Business Cycle Models
• Real Business Cycle Model
• Segmented Markets Model
• Keynesian Coordination Failure Model
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Real Business Cycle Model
• Business Cycles = Fluctuations in Total Factor
Productivity (TFP)
– Technology
– Education
• No Role for Government
• Model Fits Data Well
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Figure 11.1 Solow Residuals
and GDP
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Figure 11.2 Effects of a Persistent
Increase in Total Factor Productivity in
the Real Business Cycle Model
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Figure 11.3 Average Labor Productivity
with Total Factor Productivity Shocks
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Table 11.1 Data Versus Predictions of
the Real Business Cycle Model with
Productivity Shocks
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Figure 11.4 Procyclical Money Supply in
the Real Business Cycle Model with
Endogenous Money
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Figure 11.7 Percentage Deviations from
Trend in Money Supply and GDP
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Segmented Markets Model
• Money Important?
Real Business Cycle (RBC) Fails
• Decisions Made Based on Cash
• Cash Constraints
• Money Impacts Vary
• Modify RBC
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Segmented Markets Model
• Firms Enter Cash-Credit Model
• Sole Access to Bonds
• Timing Issue
1.
2.


Consumers and Firms
Government (Central Bank)
Unknown Bond Yields
Expectations Drive Decisions
• Modify Cash-Credit Model
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Segmented Markets Model
• Final Variable Changes
• Notice Expectations on Interest Rates
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Figure 11.5 Effects of an Unanticipated
Increase in the Money Supply in the
Segmented Markets Model
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Table 11.2 Data Versus Predictions of
the Segmented Markets Model with
Monetary Shocks
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Segmented Markets Model
• Business Cycles = Unanticipated Shocks to Money
• Liquidity Effect
– interest rate falls in short run when money supply increases
• Monetary Policy Improves Economy
– Informational Advantage
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Segmented Markets Model
Issues
• Uncertainty!
• Fooling Firms
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Figure 11.6 A Welfare-Improving
Role for Active Monetary Policy
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Keynesian Coordination Failure
Model
• Multiple Equilibria
• Coordination Problem
– House Party
– Firms Complement Each Other
– Software and Hardware
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Keynesian Coordination Failure
Model
• Increasing Returns to Scale
• zF(K, N)> zF(K,N)  > 1
MPn ↑
Labor Demand is Upward Sloping
• Assume: Labor Demand is Steeper than Labor Supply
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Figure 11.10 A Production Function
with Increasing Returns to Scale
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Figure 11.11 Aggregate Labor
Demand with Sufficient Increasing
Returns to Scale
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Figure 11.12 The Labor Market in
the Coordination Failure Model
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Figure 11.13 The Output Supply
Curve in the Coordination Failure
Model
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Figure 11.14 Multiple Equilibria in the
Coordination Failure Model
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Keynesian Coordination Failure
Model
• Multiple Equilibria
– Game Theory
• Which One?
• Psychological?
– Pessimistic
– Optimistic
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Table 11.3 Data Versus Predictions of
the Coordination Failure Model
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Figure 11.15 Average Labor Productivity
in the Keynesian Coordination Failure
Model
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Keynesian Coordination Failure
Model
• GDP Fluctuates on Waves of Optimism and Pessimism
• M2 = Optimism
• M1 = Pessimism
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Figure 11.16 Procyclical Money
Supply in the Coordination Failure
Model
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Figure 11.17 Stabilizing Fiscal Policy
in the Coordination Failure Model
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Keynesian Coordination Failure
Model
Issues
• Increasing Returns to Scale
– Weak or No Support
• Expectations Drive Business Cycles
– Useful?
– Scientific
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