1 / 40

MACROECONOMICS BGSE/UPF

This lecture explores the role of government spending, consumption, and interest rates in the Ramsey-Cass-Koopmans model. It discusses the effects of different financing methods, such as bonds or taxes, and examines the impact of wars and anticipated or unexpected changes in output. The evolution of consumption, capital intensity, and real interest rates over time is also investigated.

jackiep
Download Presentation

MACROECONOMICS BGSE/UPF

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. MACROECONOMICSBGSE/UPF LECTURE SLIDES SET 4 Professor Antonio Ciccone BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  2. 3. Applications of the Ramsey-Cass-Koopmans (RCK) model 3.1 Government spending, consumption, and interest rates 3.2 Bond versus tax financed government spending BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  3. 3.1 Government spending, consumption, and interest rates • Comparative “dynamics” in the RCK model - Permanent, surprise drop in output - Temporary, surprise drop in output - Wars, government expenditures and interest rates • The role of expectations - Permanent, anticipated drop in output - Temporary, anticipated drop in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  4. The RCK model c c-ISOCLINE: NO CONSUMPTION GROWTH k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  5. c c-ISOCLINE: NO CONSUMPTION GROWTH k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  6. Permanent, surprise fall in output for given k c c-ISOCLINE: NO CONSUMPTION GROWTH NEW k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  7. Evolution of consumption time Permanent, surprise fall in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  8. Evolution of capital intensity time Permanent, surprise fall in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  9. -- consumption can JUMP at the time new information arrives -- but consumption must be smooth (follow the first-order condition) from than onward:  There CANNOT BE an ANTICIPATED jump in consumption BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  10. Temporary, surprise fall in output for given k: PART I c c-ISOCLINE: NO CONSUMPTION GROWTH k-ISOCLINE: NO CAPITAL GROWTH NEW k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  11. Temporary, surprise fall in output for given k: PART II c c-ISOCLINE: NO CONSUMPTION GROWTH k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  12. Temporary,surprise fall in output: Equilibrium response c c-ISOCLINE: NO CONSUMPTION GROWTH NEW k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  13. Temporary,surprise fall in output: Equilibrium response c c-ISOCLINE: NO CONSUMPTION GROWTH k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  14. Evolution of the capital intensity time START of Temp fall in output END of Temp fall in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  15. Evolution of real interest rate time START of Temp fall in output END of Temp fall in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  16. Evolution of consumption time START of Temp fall in output END of Temp fall in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  17. Wars and real interest rates -- Suppose government expenditures associated with wars are surprise, temporary events -- Study the dynamic response of: capital, interest rates, and consumption to wars -- Government expenditures associated with wars decrease output available for consumption and investment  INCREASE G Same effect as temporary fall in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  18. Evolution of real interest rate time START of War END of War BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  19. BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  20. The role of expectations - Permanent, anticipated drop in output - Temporary, anticipated drop in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  21. Permanent, anticipated fall in output: PART I c c-ISOCLINE: NO CONSUMPTION GROWTH k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  22. Permanent, anticipated fall in output:PART II c c-ISOCLINE: NO CONSUMPTION GROWTH NEW k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  23. Permanent, anticipated fall in output: Equilibrium response c c-ISOCLINE: NO CONSUMPTION GROWTH NEW k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  24. Evolution of capital intensity Output actually falls time INFO of permanent FUTURE fall in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  25. Evolution of consumption Output actually falls time INFO of permanent FUTURE fall in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  26. The role of expectations - Permanent, anticipated drop in output - Temporary, anticipated drop in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  27. Temporary, anticipated fall in output for given k: PART I c c-ISOCLINE: NO CONSUMPTION GROWTH k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  28. Temporary, anticipated fall in output for given k: PART II c c-ISOCLINE: NO CONSUMPTION GROWTH NEW k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  29. Temporary, anticipated fall in output for given k: PART III c c-ISOCLINE: NO CONSUMPTION GROWTH k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  30. Temporary, anticipated fall in output: Equilibrium response c c-ISOCLINE: NO CONSUMPTION GROWTH k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  31. Temporary, anticipated fall in output: Equilibrium response c c-ISOCLINE: NO CONSUMPTION GROWTH k-ISOCLINE: NO CAPITAL GROWTH 0 k k* BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  32. Evolution of the capital intensity time END of Temp fall in output INFO of FUTURE Temp fall in output START of FUTURE Temp fall in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  33. Evolution of consumption time END of Temp fall in output INFO of FUTURE Temp fall in output START of FUTURE Temp fall in output BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  34. 3. Application of the Ramsey-Cass-Koopmans (RCK) model 3.1 Government spending, consumption, and interest rates 3.2 Bond versus tax financed government spending BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  35. Government expenditures and taxes Government intertemporal budget constraint BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  36. -- Suppose that households believe in government budget constraint -- The government cut taxes at time t -- But there is no indication that the government cuts expenditures -- WHAT HAPPENS TO DISCOUNTED FLOW OF TAXES? BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  37. Nothing, because: and the right-hand side of this equation has not changed.  Government will have to compensate current tax cut by tax increase sometime in the future. BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  38. Now let’s look at household intertemporal budget constraint: -- current tax cut does NOT affect this constraint at all as only the DISCOUNTERD PRESENT VALUE OF TAXES MATTERS -- and present value of taxes remains constant if expenditures do not change BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  39. -- TAX CUT DOES NOT CHANGE HH CONSUMPTION -- AS A RESULT IT DOES NOT CHANGE THE NATIONAL SAVINGS RATE: -- DOES NOT AFFECT: - INVESTMENT(!) - AND INTEREST RATES (!) -- HH SAVINGS INCREASES, BUT IS OFFSET BY AN INCREASE IN GOVERNMENT DEFICIT: BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

  40. Hence, government cuts taxes • Has to issue debt (government bonds) • Government ensures that real interest rate on bond mimics market interest rate (before issue of new bonds) • Households buy these new bonds with their tax savings Hence,  Household use to buy government bonds what they “save” in current taxes BGSE/UPF Macroeconomics, 2008-09 SLIDE SET 4

More Related