econ 208 marek kapicka lecture 1 introduction. what is this course about? analysis of macroeconomic...
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Econ 208
Marek KapickaLecture 1
Introduction
What is this course about? Analysis of macroeconomic policies
Government Spending Taxation and government debt Monetary policy Banking and financial intermediation
We will use micro-founded macroeconomic models to study those issues
Administration
Classes: MW 9:30-10:45 My email:
[email protected] Office hours: TTh 10:30-11:30, NH
3052 Course homepage:
http://econ.ucsb.edu/~mkapicka/E208.html
Administration
TAXintong Yang ([email protected])TA sessions: Thursdays 3:00-3:50 & 4:00-
4:50 GIRV 1116
TextbookMacroeconomics, by Matthias Doepke,
Andreas Lehnert, and Andrew Sellgren
Administration 5 problem sets
4 best ones count25 % of the final grade
Midterm (May 6, in class)No make-up25 % of the final gradeClosed book, closed notes
Final (June 12, 9-11)50 % of the final gradeClosed book, closed notes
Outline of the course
1. Introduction: A basic framework2. Government Policies
1. The Effects of Government Spending2. Government Taxation and
Government Debt3. Monetary Policy4. Banking and Financial
Intermediation
Per Capita Real GDP (in 2000 dollars) for the United States, 1900-2008
Growth rates
If gt is small,
11
t
tt y
yg
1lnln)1ln( tttt yygg
Natural Logarithm of Per Capita Real GDP
The Great Recession
1981-1982 Recession
1. US GDP, Consumption, and Government Expenditures
2. Total Taxes (black line) and Total Government Spending (colored line) in the United States, as Percentages of GDP
2. Recent Recession: Fiscal Policy
2009 Fiscal Stimulus: $787 billion (~5.5% of GDP)
Tax cuts: $288 billion Spending on
Healthcare & Education: $238 billion Infrastructure: $81 billion
4. US History of banking crises
Before 1914: Crises were a frequent phenomenon in the U.S.
National banking era 1863-1913 They have occurred at about 10
year intervals 1873,1884,1890,1893,1896,1907,191
4
U.S. National Banking Era Panics
2. How do we study macro? We cannot run experiments in
macroeconomics, so we need to construct models to be used as laboratories
Prague
A map of Prague
A map of Prague subway
How do we study macro? A good model:
Simplified, abstract, representation of reality
Omits many details, represents only essential features needed to answer a specific question
helpful to make predictions should be simple, but they need not
be realistic.
2.1 Structure of a typical model
HouseholdsChoose consumption,saving, labor supply
FirmsChoose production,
investment, labor demand
MarketsPrices such that
Supply = demand
2.1 Structure of a typical model
1. Description of goods in the economy
2. Consumers preferences over goods
3. Firms technology available to produce the
goods
4. The resources available
2.2 Prediction of a Model
Individual behavior people behave rationally (optimize) firms maximize profits
Equilibrium behavior competitive equilibrium
2.3 Microeconomic Foundations
The Approach1. Start with consumers and firms
making decisions at individual level2. Aggregate them up
Representative Consumer Assumption
Example: Benefits of this Approach
1. Monetary Policy
A Basic Intertemporal Model
A simple model where people
choose how much to consume and
how much to save A) Consumer Optimization B) Market Clearing C) Adding capital stock D) Welfare Theorems E) Infinite horizon
A Basic Intertemporal Model
First period = current period Second period = future period
To simplify, abstract from labor/leisure decision
Our interest: borrowing and saving by consumers
A Basic Intertemporal Model Preferences of consumers
U(c) is increasing, differentiable and concave
Discount factor β<1 measures how much future utility matters relative to current utility
)()( 21 cUcU
A Basic Intertemporal Model Budget Constraints:
y1, y2 are exogenous incomes b1 are savings from period 1 to period
2 r is the interest rate
)1(122
111
rbyc
ybc
Consumer’s optimization Consumers maximize utility subject to
budget constraints
Lagrangean)1(
. )()(max
122
11121,, 121
rbyc
ybctscUcUbcc
))1((
) (
)()(max),,,,(
2122
1111
21,,
21121121
crby
bcy
cUcUbccLbcc
Consumer’s optimization First order conditions
Euler Equation
)1(
)(
)(
21
22
11
r
cU
cU
)()1()( 21 cUrcU
A) Consumer’s optimization Log utility:
Solution:
)1(1
2 rc
c
*11
*1
21
*1 1
1
cyb
ry
yc
Where are we?
A Basic Intertemporal Model A) Consumer Optimization B) Market Equilibrium C) Adding capital stock D) Welfare Theorems E) Infinite horizon
B) Market Equilibrium
Suppose that there is N identical agents Market clearing condition is
Log utility:
0)( **1 rNb
1
2*
21
1
1
11
y
yr
r
yy
y