econ305_19_Nov13

econ305_19_Nov13 - an overview of recent work in two areas...

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slide 1 Advances in Business Cycle Theory an overview of recent work in two areas: Real Business Cycle theory New Keynesian Economics
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slide 2 The Theory of Real Business Cycles All prices are flexible, even in short run: thus, money is neutral, even in short run. classical dichotomy holds at all times. Fluctuations in output, employment, and other variables are the optimal responses to exogenous changes in the economic environment. Productivity shocks are the primary cause of economic fluctuations.
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slide 3 The economics of Robinson Crusoe Economy consists of a single producer-consumer, like Robinson Crusoe on a desert island. Crusoe divides his time between leisure working catching fish (production) making fishing nets (investment) Crusoe optimizes given the constraints he faces.
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slide 4 Shocks in the Crusoe island  economy Big school of fish swims by the island. GDP rises: Crusoe’s fishing productivity is higher Crusoe’s employment rises: He decides to shift some time from leisure to fishing to take advantage of the high productivity
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slide 5 Shocks in the Crusoe island  economy Big storm hits the island. GDP falls: The storm reduces productivity, so Crusoe spends less time fishing for consumption. Investment falls, because it’s easy to postpone making nets until storm passes. Employment falls: Since he’s not spending as much time fishing or making nets, Crusoe decides to enjoy more leisure time.
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slide 6 Economic fluctuations as  optimal responses to shocks In Real Business Cycle theory, fluctuations in our economy are similar to those in Crusoe’s economy. The shocks are not always desirable. The shocks are not always desirable.
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econ305_19_Nov13 - an overview of recent work in two areas...

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