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Unformatted text preview: EC 210 Revision Lectures Milan Lisicky [email protected] May 5, 2010 1/28 1 dynamic money with money 2 real business cycle model 3 dynamic model in the IS LM framework 4 imperfect information 5 segmented markets: wageinadvance 6 coordination failure 2/28 Dynamic Model with Money: CashInAdvance consumption and investment expenditure can be paid for by money issued by the government, opportunity cost R payment services issued by banks, real cost H ( X ) role of the timing assumption (cashinadvance constraint): allows money to determine prices without further assumptions has no other effects in particular, recall that consumers and firms are perfectly rational and foresighted ⇒ will allocate their resources exactly as in the basic dynamic model money is created by government PG + (1 + R ) B = PT + B + ( M M ) 3/28 tradeoff between cash and banking services is governed by equality of marginal benefits of using X : P + P R marginal costs: P + P H x ( X ) hence R = H x ( X ), or X * = J ( R ) price level determined by incomeexpenditure equality PY = PC + PI + PG + PH ( X ) + PH ( X f ) cash to spend on consumption PC = M c + (1 + R ) B c P T B c + P X cash to spend on investment PI = (1 + R ) B f B f + P X f market clearing on the bond and money market implies PY = PX + PX f + M + PH ( X ) + PH ( X f ) M = PL ( Y , R ) = PL ( Y , r ) 4/28 Implications for the dynamic model within period 1: N d MP N = w N s MRS l , C = w intertemporal linkages: Y d MPK = r + d Y s MRS l , l = w (1+ r ) w MRS C , C = 1 + r + intertemporal constraints all the optimality conditions depend only on relative prices there is a 1:1 link between M and P in M = PL ( Y , R ) hence neutrality : a oneoff ↑ M ⇒↑ P of equal magnitude no real effects as far as i e is not affected Ricardian Equivalence still applies: ↑ T matched by ↑ M or ↓ T has no real consequences 5/28 Money Market Equilibrium: M = M c = PL ( Y , R ) notice: P countercyclical ↑ Y ⇒↓ P intuition: higher PY must match the cash spending PC + PI purchasing power of money must increase: ↓ P inflation can still be measured as procyclical over time: if the shock that made Y increase was temp. or at most persistent we must eventually get back to the initial equilibrium (initial P ) period of abovetrend Y will coincide with price increases 6/28 1 dynamic money with money 2 real business cycle model 3 dynamic model in the...
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This note was uploaded on 09/12/2010 for the course PHYS 15289 taught by Professor Oreilly during the Spring '09 term at Aberystwyth University.
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