Lecture 24 Fiscal Policy in the classical model

Lecture 24 Fiscal Policy in the classical model - Eco320L...

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Eco320L Spring 2010, Professor Beatrix Paal updated 10/21/2010 1:20 PM Lecture 24: Fiscal Policy in the Classical model 1 Lecture 24 Fiscal policy in the classical model Last time real business cycle theory ( Chapter 10.1 ) Today interest-elastic labor supply fiscal policy in the classical model ( Chapter 10.1 ) Next time unemployment ( Chapter 3.5 and 10.1 ) money in the classical model ( Chapters 10.2 and 10.3 ) 1 What are productivity shocks? examples of aggregate TFP shocks Development of new products or production techniques Introduction of new management techniques Changes in the quality of capital or labor Changes in the availability or cost of raw materials or energy Unusually good or bad weather Changes in government regulations affecting production are these shocks large enough? RBC answer: the shocks are small, but they propagate in a way to result in larger output fluctuations mechanisms: – amplification in the labor market (discussed in Ch 3) – cumulative effects of autocorrelated shocks – augment model with utilization rates of capital and labor 2
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Eco320L Spring 2010, Professor Beatrix Paal updated 10/21/2010 1:20 PM Lecture 24: Fiscal Policy in the Classical model 2 ABC Figure 10.3 Cumulative effects of small shocks “random walk with drift” shock to technology are small i.i.d. random variable: ݁ level of technology itself is a function of these: ݕ ൌݕ ௧ିଵ ൅0 .01൅݁ 3 ݁ : random b/w –1.0 and 1.0 ݕ ௧ିଵ Utilization rates of capital and labor The Solow residual The aggregate production function is ܻൌܣܨሺܭ ,ܰሻ We have data on ܻ,ܭ,ܰ Assume an algebraic form of the production function: ܨ ܭ,ܰ ൌ ܭ ܰ ଵିఈ Estimate ߙ from the data (typically ߙൎ1 3 ⁄ ሻ Compute the Solow residual as Capital stock vs. capital services, labor vs. labor services The same amount of capital can produce more or less output depending on how intensively it is used Similarly, labor can work at different intensities These intensities are measured with the utilization rates ݑ and ݑ Capital and labor services are defined as – capital services = ݑ ܭ – labor services = ݑ ܰ Output is ܻ ൌ ܣܨ ݑ ܭ,ݑ ܰൌ ܣ ݑ ܭ ݑ ܰ ଵିఈ 4 ܵ݋݈݋ݓ ݎ݁ݏ݅݀ݑ݈ܽ ൌ ܻ ܭ ܰ ଵିఈ
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Eco320L Spring 2010, Professor Beatrix Paal updated 10/21/2010 1:20 PM Lecture 24: Fiscal Policy in the Classical model 3
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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 24 Fiscal Policy in the classical model - Eco320L...

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