Lecture 5. Principles of Macroeconomics презентация

Principles of Macroeconomics ECO 1019 Lecture 5 Antonio Mele [email protected]

In this Lecture:

Intertemporal decisions They involve a trade off across periods of time: between current and future consumption, between current and future taxes, etc. In Solow model: arbitrary intertemporal decision rule, constant saving rate We use microeconomic principles to have a more detailed analysis

Our model Two period model: today and tomorrow For simplicity: income is exogenous (no work/leisure decision). This helps us focus on the consumption-savings decision Lump sum taxes

Budget Constraints

Budget Constraints

Simplify

Next,

Consumer’s Lifetime Budget Constraint

Simplified Lifetime Budget Constraint

Simplified Lifetime Budget Constraint: Slope-Intercept

Consumer’s Lifetime Budget Constraint

A Consumer’s Indifference Curves

Sara’s Desire for Consumption Smoothing

Optimization

A Consumer Who Is a Lender

A Consumer Who Is a Borrower

An Increase in Current Income for the Consumer

The Effects of an Increase in Current Income for a Lender

Observed Consumption-Smoothing Behavior

Percentage Deviations from Trend in Consumption of Durables and Real GDP

Percentage Deviations from Trend in Consumption of Nondurables and Services and Real GDP

An Increase in Future Income for the Consumer

An Increase in Future Income

Temporary and Permanent Increases in Income

Temporary Versus Permanent Increases in Income

An Increase in the Real Interest Rate

An Increase in the Market Real Interest Rate

An Increase in the Real Interest Rate for a Lender

Effects of an Increase in the Real Interest Rate for a Lender

An Increase in the Real Interest Rate for a Borrower

Effects of an Increase in the Real Interest Rate for a Borrower

Introducing the government Government buys G, financed either with taxes or debt. T=Nt, T’=Nt’ Private and government bonds are indistinguishable, have same interest rate r

Government Budget Constraints

Government Budget Constraints

Government Budget Constraints

Competitive equilibrium Each consumer chooses current and future consumption and savings optimally given interest rate r The government present-value budget constraint holds The credit market clears

Credit Market Equilibrium Condition

Credit Market Equilibrium: Implications

Income-Expenditure Identity

Ricardian Equivalence

Ricardian Equivalence

Ricardian Equivalence

Ricardian Equivalence with a Cut in Current Taxes for a Borrower

Ricardian Equivalence and Credit Market Equilibrium

Discussion of the assumptions Ricardian equivalence theorems says government debt represents our future liabilities as a nation, must be paid by taxing citizens in the future. It’s a good benchmark to start thinking about government debt, however some of the assumptions are very strong! Situations in which it might not hold: Heterogeneity: different taxes for different people Finite lifetimes Distortionary taxes Imperfections in the credit markets

Readings Savings are generally a good idea http://www.youtube.com/watch?v=C_8TGTKdrlY The cost of repair http://www.economist.com/node/17173933?story_id=17173933 Economists show “Cash-for-clunkers” was a clunker http://www.theatlantic.com/business/archive/2010/10/economists-show-cash-for-clunkers-was-a-clunker/65356/