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ECONOMIC MODELS AND THEIR USE IN ECONOMIC POLICY

ECONOMIC MODELS AND THEIR USE IN ECONOMIC POLICY. INTERVENTIONS - DISEQUILIBRIA. Markets indicator consequences 1.Product market prices inflation. deflation 2.Labor market wages unemployment 3.Capital market interests capacity utilization

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ECONOMIC MODELS AND THEIR USE IN ECONOMIC POLICY

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  1. ECONOMIC MODELS AND THEIR USE IN ECONOMIC POLICY

  2. INTERVENTIONS - DISEQUILIBRIA Markets indicator consequences 1.Product market prices inflation. deflation 2.Labor market wages unemployment 3.Capital market interests capacity utilization 4.Foreign exchange exch. rate deficit. surplus. Problems Conflicting goals: Phillips curve Indirect effects: Lags: establishing the problem. decission making. implementation

  3. ECONOMIC MODEL C=f(Y-T) C = a + b*(Y-T) consumptionfunction I=g(DY, R) I = c*DY + d*R investmentfunction G=T G = T government Y=C+I+G Y=C+I+G identity GDP Components: variables: endogenous. exogenous parameters: a>0. 0<b<1. c>0. d<0 equations: behavoiuristic. instituonal. tehnical. identities

  4. ECONOMETRIC MODEL Structural form: (1) Ct= a + b*(Yt-Tt) (2) It = c*(Yt-Yt-1) + d*Rt (3) Gt = Tt (4) Yt = Ct + It + Gt Yt-1predeterminedendogenousvariable. dynamic model Reduced form: (4) Yt(1-b-c) = a + (1-b)*Tt + d*Rt – c*Y t-1 ifdefiningA=1/(1-b-c) (a multiplier) weget (4) Yt= a*A + (1-b)*A*Tt+ d*A*Rt - c*A*Y t-1 (1) Ct = a + b*(a*A + (1-b)*A*Tt+ d*A*Rt - c*A*Y t-1 -Tt) (2) It = c*(a*A + (1-b)*A*Tt+ d*A*Rt - c*A*Y t-1 - Y t-1) + d*Rt (3) Gt = Tt

  5. PUBLIC SECTOR Allocation– careforpublicgoods Redistribution – justice, progresivity Stabilisation – macroeconimcstability Market failures monopolies publicgoods externalities nonperfectmarkets informationalproblems macroeconomicdisequlibria Publicprovision. publicfinancingandpublicregulation

  6. DEMAND AND SUPPLY SIDE ECONOMICS Y = C + I + G C = a + b(Y-T) T =T0 + tY ********* Y = a + b(Y - T0 - tY) + I + G Y = a + bY - bT0 – btY + I + G Y(1-b+bt) = a - bT0 + I + G Y = 1/(1-b+bt)*a – b/(1-b+bt)*T0 + 1/(1-b+bt)*I + 1/(1-b+bt)*G – b/(1-b+bt) taxmultiplier – “supplyside” economics 1/(1-b+bt) expendituresmultiplier – “demandside” economics

  7. FINANCING OF BUDGET DEFICIT T – G = Bgp + Bgf + dH + dR + PP + dZ T- G = Bgp+ Bgf + dH Problems: dH – inflation Bgp – crowding out (physical. financial) Bgf - foreign savings. monetization dH – money printing dH = ( p + r )/ v = p/v + r/v dH = p/v (inflationary tax) + r/v (seignorage) ************** Bgp – borrowing at home. Bgf - borrowing abroad. H – base money. dR – reduction in foreign exchange reserves. PP – property sales. Z – late payments p – inflation. r – growth. v – velocity of circulation

  8. RESOLVING PUBLIC DEBT dD = D(i-r) + PR – dH solvingbyfiscalpolicy (1) dD = 0  0 = D*(i-r) + PR  - PR = D*(i-r) solvingbyinflation (2) dD = 0  0 = D*(i-r) – (p+r)/v  (p+r) = v*(D*(i-r))  p = v* D* (i-r) – r D – publicdebt/GDP. PR – primary deficit/BDP . p – inflation. i – interestrate. r – growth. v – velocityofcirculation Example: v=10, D=0.8*GDP, i=0.05, r=0.02 -PR =0.8*(0.05-0.02) = 0.024  2.4% primarysurplus p =10*0.8*(0.05-0.02)-0.02=0.22  22% inflation

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