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# ch9notes - The Short-run Model Growth Theory explains...

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Unformatted text preview: The Short-run Model Growth Theory explains long-run output trends. The Quantity Theory explains long-run inflation trends. Short-run model explains fluctuations around trend. Current output may be away from trend. Current inflation may be away from trend. Short-run Output Fluctuation Current Output = Long-run Trend + Short-term Fluctuations Output Current : t Y : t Y Long-run Trend Output Definition of Fluctuations: t t t t Y Y Y Y- ~ Constructing the Trend Trend Output can only be inferred from actual observations. Trend curve could be drawn freehand on a graph. Statistical procedures are typically employed. The Hodrick Prescott Filter Let , , , 1 , T t y t = denote logs of a time series, t Y . Now define trend series, T t t , , 1 , = , that solves: [ ] --- +- = - =- + T t T t t t t t t t t y 1 1 2 2 1 1 2 ) ( ) ( ) ( min For comparison to t Y , we would then compute ) exp( t t Y = By construction, on average Actual GDP = Potential GDP...
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ch9notes - The Short-run Model Growth Theory explains...

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