1 / 25

Introduction to Macroeconomic Theory

Introduction to Macroeconomic Theory. Dr. Kai Sun. Modern macroeconomics. Modern Macroeconomics employs simple, tractable models in pursuit of 3 goals: Account for and understand recurrent patterns of economic activities (stylized facts), such as business cycles.

jeffreymdavis
Download Presentation

Introduction to Macroeconomic Theory

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. Introduction to Macroeconomic Theory Dr. Kai Sun

  2. Modern macroeconomics • Modern Macroeconomics employs simple, tractable models in pursuit of 3 goals: • Account for and understand recurrent patterns of economic activities (stylized facts), such as business cycles. • Interpret specific episodes, such as the Asian financial crisis. • Conduct policy analysis.

  3. Major macroeconomic issues • Long-run issue: economic growth. • Short-run issue: business fluctuations and unemployment. • Policies: fiscal and monetary.

  4. The Lucas Critique • Traditional models are fatally flawed, and are of no use in guiding policy. • Reasons: agents (individuals) are treated as machines who always respond in the same way to the same set of stimuli.

  5. The Lucas Critique • Rational expectation revolution: agents do not act as machines; they adapt to changes in the economic environment in a systematic, rational manner. • Rational expectation: best forecast that uses all available information. • Rational: agents do not make systematic mistakes; in a mathematical model, they are assumed to know the distribution of exogenous shocks.

  6. Modern macroeconomics Assumption: the observed movements in economic aggregates are the result of the optimal responses of rational agents who maximize their objectives given some constraints and the economic environment they live in.

  7. Modern macroeconomics • Construct one general specification of the economic environment, including preferences, constraints, and production technologies. • Derive agents’ decision rules which reflect optimal behavior given the state of the environment, and indicate optimal responses to changes in the environment.

  8. Modern macroeconomics Requirements of the model: • Empirically relevant. • Internally consistent.

  9. A first look at the data

  10. A plot of U.S. post-war real GDP

  11. What should we look for? • Growth facts: trend (slope) of the data series. • Business cycle facts: wiggles of the curve indicates economic fluctuations, i.e., booms and recessions.

  12. Consumption, durable and non-durable

  13. Major Components of GDP

  14. Growth facts – Kydland and Prescott’s monograph • Real output grows at a relatively constant rate. Average annual growth rate: 3.35%. • Capital/labor ratio is increasing. • Capital/output ratio is constant. • Real profitability of capital is roughly constant.

  15. The Hodrick-Prescott filter • Choose a trend variable, , to minimize

  16. The Hodrick-Prescott filter • In R, use the command fdata = hpfilter(log(data),1600) • Why take logs? • It is easy to get percentage deviations, Log(y/x) = log(y)-log(x) = (y-x)/x approximately. • Percentage deviations are what we care about, not the size of the variables.

  17. The Hodrick-Prescott filter

  18. De-trended GDP

  19. De-trended consumption, investment and government expenditure

  20. De-trended Data Properties std rel-std crossy y 1.73403 1.00000 1.00000 c 1.31100 0.75604 0.76665 durc 5.34381 3.08173 0.58758 ndurc 1.13174 0.65266 0.72899 i 8.13539 4.69162 0.83448 g 3.71072 2.13994 0.19195 Note: rel-std measures the variations of the variables relative to that of y crossy measures the correlation coefficients of the variables and y

  21. Business cycle facts • Amplitude of fluctuations • Degree of comovement (i.e., correlation) with real GDP. • Phase shift (leads and lags) of a variable relative to the business cycle.

  22. Amplitude of fluctuations • If the total hours of work have the same magnitude of fluctuations as output • but hours per worker fluctuate much less • This suggest that unemployment is the major cause of the fluctuations in total hours.

  23. Amplitude of fluctuations • Consumption of non-durables and services fluctuates much less than output. • Investment and consumption durables fluctuate much more than output. • Wages vary about the same as productivity.

  24. Comovement with GDP • Consumption, investment, and hours of work are highly pro-cyclical (i.e., positively correlated with GDP). • Productivity is pro-cyclical. • Capital stock and government expenditures are almost uncorrelated with output.

  25. Phase shift of variables • Employment lags the cycle. • Productivity leads the cycle. • Hours per worker is nearly contemporaneous with GDP.

More Related