Lecture 23 Classical business cycle theory

Lecture 23 Classical business cycle theory - Eco320L Spring...

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Eco320L Spring 2010, Professor Beatrix Paal updated 10/18/2010 10:26 AM Lecture 23: Classical Business Cycle Theory 1 Lecture 23 Classical business cycle theory Last time working with the IS/LM/FE model: the 4 steps ( worksheet ) the AD/AS model Today real business cycle theory ( Chapter 10.1 ) fiscal policy in the classical model ( Chapter 10.1 ) Next time money in the classical model ( Chapters 10.2 and 10.3 ) 1 Business cycle theories Questions to be answered Why are there business cycles? What (if anything) should the government do about them? Two elements of a business cycle theory origins of economic shocks model of how the economy responds to those shocks Classical business cycle theory business cycles are mostly caused by real shocks (as opposed to nominal shocks ) – most important real shocks are technology shocks aka productivity shocks – others include: fiscal policy, investment demand, etc. shocks in response, the general equilibrium of the economy fluctuates – by contrast, in the Keynesian model the economy fluctuates around the equilibrium; cycles are deviations from equilibrium since fluctuations are the economy’s best response to shocks, the government should not try to counteract the shocks and smooth fluctuations 2
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Eco320L Spring 2010, Professor Beatrix Paal updated 10/18/2010 10:26 AM Lecture 23: Classical Business Cycle Theory 2 Real Business Cycle theory (RBC theory) prominent proponents: Edward Prescott and Finn Kydland – started their work in the late 1980’s – won the Nobel prize in 2004 for RBC theory most important real shock: productivity shock Plan review implications of TFP shocks in IS/LM/FE model (qualitative) contrast these implications with the business cycle facts –many ma tche s – potential problem: inflation and the price level look at quantitative findings from some early RBC studies – again, many good matches – potential problem: productivity (in model) is too highly correlated with output some extensions of the basic RBC model – capital and labor utilization – interest-elastic labor supply – fiscal policy shocks – unemployment – household production 3 Application: Temporary positive TFP shock L, M/P r I, S r r N Y w N I Y ܮ ݎ൅ߨ ܮ , ܯ ܯ ܲ ܵ ݎ, ܻ ൌ ܻ ܵ ݎ,ܻ ൌ ܫ ܫ ݓ ݓ ܰܦ ࡺࡰ ܰ ࡲࡱ ܰܵ ܨ ܭ ,ࡺ ܻ ܰ ࡲࡱ ࡲࡱ ࡲࡱ ݎ ܮܯ ܲ ܮܯ ࡲࡱ ܨܧ ݎ 4
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Eco320L Spring 2010, Professor Beatrix Paal updated 10/18/2010 10:26 AM Lecture 23: Classical Business Cycle Theory 3 Temporary positive TFP shock -- Summary and comparison to the data variable model data match?
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This note was uploaded on 10/25/2010 for the course ECO 320L taught by Professor Kendrick during the Fall '10 term at University of Texas at Austin.

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Lecture 23 Classical business cycle theory - Eco320L Spring...

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