23/9 After the lecture yesterday I
was asked to focus more on two things: actual policy issues and data. As to
the first, I agree that the models are not goals in themselves but
analytical tools useful for explanation of macroeconomic mechanisms and
evaluation of alternative policies. A full understanding of the models is
necessary for being able to apply them in precise economic analysis.
As to data and empirics: yes, empirical evidence is important.
Therefore, from the empirical literature we pick up numbers to be connected
to key parameters. And there are references in the lecture notes to relevant
empirical material. Sometimes there are also links at the
lecture webside to "data".
Yet the course is primarily about theory, models and methods
for their application. Nevertheless, when I for instance sketch the main
ides in Barro's dynasty model and for lack of time do not say much about the
empirics, this does not mean that you can not find at least some empirics in
the lecture notes. In the Barro case you can find some at p. 255-56 and p.
274-76. In addition, in Elmendorf and Mankiw (on the agenda 20th of Oct.)
there is a survey on empirical literature concerning the Ricardian
equivalence issue. And
here
there are links to more.
23/9 In the list of possible supplementary textbooks in the course plan, I have forgotten Ben J. Heijdra: Foundations of Modern Macroeconomics, OUP 2009, http://www.heijdra.org/fomm2.htm. This book is a useful attempt at bridging the gap between bachelor course texts and PhD course texts.
30/9 An example of Danish empirics
of relevance for the controversy about Ricardian Equivalence or
Non-equivalence:
C. T. Kreiner, D. D. Lassen and S.
Leth-Petersen (2014), Liquidity
Constraint Tightness and Consumer Responses to Fiscal Stimulus Policy.
Working Paper.
20/10 In today's lecture a good question was raised from the audience about the Ricardian Non-equivalence issue as discussed in the lecture notes, Section 13.1. Although I have not discovered clear errors in the text, I admit that the exposition was not well written. The first six pages of the chapter has therefore been rewritten. The new version of these pages is here. The remainder of the chapter is unchanged. Nevertheless, here is the chapter as whole with the revised first six pages inserted.
27/10 In today's discussion of issues in debt policy I presented a table with anti-fiscal policy views in the left column and Keynesian counter arguments in the right column. Row 3 in the table mentioned Ricardian equivalence in the left column and Ricardian Non-equivalence in the right column. In relation to this, I just want to mention that at the exam in January 15, 2014, Problem 3 was about whether expansionary fiscal policy may succeed being expansionary even if the household sector consists of Barro-style dynasty households with infinite horizon, taxes are lump sum, and credit markets are perfect. This issue may give an additional perspective on the discussion.
2/11 A reference in Ch. 14, p. 597, to Groth and Madsen (2013), is to this paper (from May 2015 = most recent version).
8/11
1. A question from the floor
in today's lecture about the
fundamental house price and a hypothetical price bubble lead me to review
Appendix C of Ch. 15 and slightly extend the last paragraph in this
way.
2.
As briefly touched upon also in today's lecture, rational expectations
should be seen as a benchmark case. On alternatives to rational
expectations, see e.g.:
Fuster, Laibson, and Mendel, Natural expectations and macroeconomic
fluctuations,
Journal of Economic Perspectives,
vol. 24, no. 4, Fall 2010.
More in
Supplementary material.
11/11 Follow-up
on hysteresis in employment and unemployment, cf. Midterm Paper Problem
1: See, e.g., DeLong, J. B., and L. H. Summers,
Fiscal
Policy in a Depressed Economy [with Comments and Discussion],
Brookings Papers on Economic Activity,
Spring 2012, 233-297. Includes discussion by Martin
Feldstein and Valerie Ramey.
See also
Ball, DeLong, and Summers (2014), Fiscal
policy and full employment. Center on Budget
and Policy Priorities, April 2, 2014.
17/11 Concerning Problem 1e)-h) in the Midterm problem set, the following question, as I understood it, was raised from the floor: Could there not be dynamic output effects across periods from the expansionary fiscal policy during the slump, and if so, why are they not taken into account. I agree that the text should have said explicitly that such possible effects are ignored. The motivation for ignoring them is twofold. First, such effects are uncertain and difficult to assess. Second, an exercise problem should not be too complex. This is also the reason, that under the expansionary fiscal policy the slump is assumed over after only two periods.
7/12 Question 1:
Saddle-point stability was defined in a lecture I could not attend. How is
it defined?
Answer: Here is the
definition.
Question 2: The course plan,
also the final version, has under point 5.2 a topic named "the interplay of
nominal and real price rigidities". Where in syllabus is that topic treated?
Answer: Almost nowhere! It is a mistake that topic was not deleted in the
final version of the course plan. It is only briefly touched on in Ch. 19,
p. 728, point 2), and p. 759. Those interested may read Section 6.6 in D.
Romer, Advanced Macroeconomics, 4th. edition, available from the
faculty library.
16/12 Question 3: Chapter 14, p.581: Is it correct that
?
CG : Yes, but only if the maximized value of the right-hand side is meant. That is what the asterisk on the left-hand side indicates.
I don’t think I really understand what α and S_t are. In the note p. 628 you write S_t is the number of square meter-months at disposal for utilization, but I don’t understand what square meter-months mean.
where t is a year,
so
,
but what does this number mean?
floor
area, and let the unit of a
housing service be “access to
floor
area in a month”. Now, alpha is the housing service per house per year,
since the time unit of the model is one year. That is, alpha =
units
of housing services. So
units
of housing services.
CG: It means we normalize alpha to be one. That is, we let one unit of floor
area be
and
one time unit be 1 year.
CG: “…in
the medium run”
here means in steady state. But the
steady state shifts if a tax changes, cf. Fig. 15.10. Nevertheless, marginal
building costs in any of the possible steady states are the same and equals
the unchanged p*. How is that possible? It is possible, because the
transformation function T is homogeneous of degree one, see p. 635,
the line right above eq. (15.55).
This
is the logic. But I agree,
it is not well
expressed in the text. Indeed, p. 636, line 10-11, starting with “Due to …”
should read: “Due to the specific form of the
positive relationship between building productivity and H,
implied by the transformation function T
being homogeneous of degree one in I and H, the
marginal” (additions are in read).
CG:
First, that p* is constant follows from answer to
Question 5.
Second, p* is a real price and equals real marginal
costs in steady state. A real price is a nominal price divided by a relevant
price index, the deflator. The deflator could be the consumer price index or
the GDP deflator. Suppose, it is here the latter. Then the relative price
p* will tend not to change if
technical progress in the
production of intermediate goods for construction follows the general trend
in the economy. Indeed, in that case production costs of intermediate goods
for construction will tend to follow the general trend of productions costs
in the economy.
"Also, in exercise VI.4.g is the
following correct?
Higher r increases the rate of return to safe bonds,
therefore q, the market value of the capital, decreases in order to ensure
that the rate of return on the existing capital stock increases
correspondingly."
As a supplement to the
Niklas' answer I would like to add a general point related to method:
I recommend that you always keep in mind whether a
given exercise problem is within partial equilibrium analysis or general
equilibrium analysis. The present problem, Exercise VI.4, is throughout,
including question g), within partial equilibrium analysis: a single firm's
value maximization s.t. constraints involving market parameters that are
exogenous to the firm.
The firm faces a given downward-sloping
demand curve (**), and question g) is just about how the firm, being
initially in a steady state, responds if the interest rate shifts to a
higher level, thereby making the past steady state obsolete. How the rise in
the interest rate might affect average q in the economy as a whole is an
entirely different question and is not something that the firm facing the
given downward-sloping demand curve (**) cares about and responds to.
Similarly, when we describe the Slutsky
substitution, income, and wealth effects in a given context, we are just
performing partial equilibrium analysis and describe how a single agent
responds to shifts in variables that are exogenous to the agent.
Back
to
lectures.