economic models and their use in economic policy
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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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interventions disequilibria
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

economic model
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

econometric model
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

public sector
PUBLIC SECTOR

Allocation– careforpublicgoods

Redistribution – justice, progresivity

Stabilisation – macroeconimcstability

Market failures

monopolies

publicgoods

externalities

nonperfectmarkets

informationalproblems

macroeconomicdisequlibria

Publicprovision. publicfinancingandpublicregulation

demand and supply side economics
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

financing of budget deficit
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

resolving public debt
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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