ps11macro2sp08ans - Econ 387L: MacroII Spring 2008,...

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Econ 387L: MacroII Spring 2008, University of Texas at Austin Instructor : Dean Corbae Unpleasant Monetarist Arithmetic (a) The nominal budget constraint: p t c t + p t q t B t +1 + M t +1 + p t τ t p t n t + B t + M t Expressed in real terms this budget constraint becomes c t + q t p t +1 b t +1 + p t +1 p t m t +1 + τ t n t + b t + m t . (1) where b t = B t /p t and m t = M t /p t (b) The real CIA is given as c t m t (2) In nominal terms this constraint is p t c t M t (c) The government budget constraint in nominal terms is p t τ t + p t q t B t +1 + ¡ M t +1 M t ¢ p t g + B t In real terms, we get the following τ t + q t p t +1 b t +1 + μ p t +1 m t +1 p t m t g + b t (3) (d) A competitive equilibrium for the economy described above consists of sequences of prices { p t ,q t } t 0 and quantities { c t ,n t ,b t ,m t t } t 0 such that i. given { p t t t } t 0 household solves max { c t ,n t ,b t ,m t } t 0 X β t u ( c t t ) s.t. ( 1 ) , ( 2 ) t [0 , 1] m t +1 t +1 0 , t ii. given g , the government maintains balanced budget, i.e ( 3 )ho ldsw ith = , t .
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ps11macro2sp08ans - Econ 387L: MacroII Spring 2008,...

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