PIIBP2_LEC4_mau - Part IIB Paper 2: Business Cycle Theory...

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Unformatted text preview: Part IIB Paper 2: Business Cycle Theory LECTURE 4: Real Business Cycles Mauricio Prado University of Cambridge 11 March 2011 Mauricio Prado (University of Cambridge) Part IIB P2 - Business Cycles - Lecture 4 11 Mar 2011 1 / 27 Outline of Lecture Summary so far Keynesian vs Classical business cycles Basic features and assumptions of RBC models A model of stochastic growth ( = business cycles) Mauricio Prado (University of Cambridge) Part IIB P2 - Business Cycles - Lecture 4 11 Mar 2011 2 / 27 Readings Sorensen & Whitta-Jacobsen, Ch. 19.4 Stadler, G. W. (1994), Real Business Cycles, Journal of Economic Literature, Vol 32, No 4 Romer, ch. 4, sections 4.3-4.5 Mauricio Prado (University of Cambridge) Part IIB P2 - Business Cycles - Lecture 4 11 Mar 2011 3 / 27 Summary so far Fluctuations in output may be generated because of shocks to aggregate demand (Keynesian), since supply is upward sloping These are due to various imperfections, e.g. imperfect competition plus nominal rigidities and/or imperfect information Neoclassical view: if aggregate supply is vertical, then only shocks to production (supply side) can cause output to fluctuate nal rigidities and/or imperfect information lassical view: if aggregate supply is vertical, then only shocks t uction (supply side) can cause output to &uctuate Mauricio Prado (University of Cambridge) Part IIB P2 - Business Cycles - Lecture 4 11 Mar 2011 4 / 27 Main features of a Real Business Cycle (RBC) model It is a Walrasian, and therefore entirely real model Perfect competition, no market imperfection (e.g. externalities, asymmetric information, etc.), fully flexible nominal prices (money is neutral) It is a dynamic, stochastic growth model It is a neoclassical growth model, where saving determines capital accumulation, output, etc. Technology shocks and their propagation create fluctuations around the steady state of all macro variables Growth and fluctuations explained by the same model It is fully microfounded Agents choose how much to save, to work and to lend (households) or rent (firms) factors optimally Fluctuations reflect optimal reactions to shocks Mauricio Prado (University of Cambridge) Part IIB P2 - Business Cycles - Lecture 4 11 Mar 2011 5 / 27 The basic stochastic growth model A micro-founded stochastic version of the Solow model Model is dynamic (see intertemporal macro, IIA - paper 2) Two types of agents: Infinite households, who live forever, provide labour to firms at a real wage rate w t , and own capital which they lend to firms at a rental rate r t (all identical) Infinite firms who produce a homogeneous good and rent capital and labour (all identical) Simplifications: No technology growth, no population growth Labour supply is inelastic: agents do not value leisure, and therefore supply all of their labour endowment (normalised to 1) Total population is normalised to 1 (thus all quantities are per capita) The model is solved analytically by calibrating some parameters appropriately...
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PIIBP2_LEC4_mau - Part IIB Paper 2: Business Cycle Theory...

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