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# ECONOMIC MODELS AND THEIR USE IN ECONOMIC POLICY - PowerPoint PPT Presentation

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

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

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

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

Allocation– careforpublicgoods

Redistribution – justice, progresivity

Stabilisation – macroeconimcstability

Market failures

monopolies

publicgoods

externalities

nonperfectmarkets

informationalproblems

macroeconomicdisequlibria

Publicprovision. publicfinancingandpublicregulation

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

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

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