graduate_macro_notes3

graduate_macro_notes3 - Notes on Graduate Macroeconomics:...

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Unformatted text preview: Notes on Graduate Macroeconomics: Part 3. Predictions of Neoclassical Model Yongsung Chang February 3, 2009 1 Predictions of Basic Neo-Classical Model 1.1 Productivity Shock 1.1.1 Temporary Productivity Shock: Oil Price Shocks If we consider production function in terms of gross output e Y = G ( K,N,M ) where e Y is gross output and M is material input, an increase in material price (cost shocks such as oil price shock) can be viewed as a low TFP for the net output (value added). As figure below shows, oil price change tends to be very temporary. Prediction of the Basic Model Economy to a very temporary decrease in TFP (auto-correlation of .7) 1 Figure 1: Log of oil price relative to GDP deflator: Level and Change 1 9 5 5 1 9 6 0 1 9 6 5 1 9 7 0 1 9 7 5 1 9 8 0 1 9 8 5 1 9 9 0 1 9 9 5 2 0 0 0- 4- 3 . 5- 3- 2 . 5- 2- 1 . 5- 1- 0 . 5 Y e a r lo g ( P oil / P ) 1 9 5 5 1 9 6 0 1 9 6 5 1 9 7 0 1 9 7 5 1 9 8 0 1 9 8 5 1 9 9 0 1 9 9 5 2 0 0 0- 0 . 8- 0 . 6- 0 . 4- 0 . 2 0 . 2 0 . 4 0 . 6 0 . 8 1 Y e a r ln ( P oil / P ) 10 20 30 40 50-1-0.8-0.6-0.4-0.2 A (or G), K time 10 20 30 40 50-8-6-4-2 2 C, I, Y time 10 20 30 40 50-1-0.8-0.6-0.4-0.2 0.2 0.4 Labor, Wages time 10 20 30 40 50-0.04-0.03-0.02-0.01 0.01 0.02 Interest Rate time 2 Consumption, Output, Investment, Hours, Real Wages all decrease. Investment decreases the most: a temporary negative shock is ab- sorbed by the savings (thus investment in a closed economy) not by the consumption. Consumption does not respond much to a tempo- rary shock (consumption smoothing, permanent income hypothesis). Prediction of the Basic Model Economy to a very temporary increase in TFP (auto-correlation of .7) 10 20 30 40 50 0.2 0.4 0.6 0.8 1 A (or G), K time 10 20 30 40 50-2 2 4 6 8 C, I, Y time 10 20 30 40 50-0.2 0.2 0.4 0.6 0.8 1 1.2 Labor, Wages time 10 20 30 40 50-0.02-0.01 0.01 0.02 0.03 0.04 Interest Rate time Consumption, Output, Investment, Hours, Real Wages all increase. Investment decreases the most. Consumption does not respond much to a temporary shock (consumption smoothing, permanent income hypothesis). Hours worked respond a lot (substitution effect dominates the income effect). 3 1.1.2 Persistent Productivity Shock The (cyclical) variation in TFP is fairly persistent (e.g., its autocorrelation is close to .95). Prediction of the Basic Model Economy to a persistent productivity shock (auto-correlation of .95) 10 20 30 40 50 0.2 0.4 0.6 0.8 1 A (or G), K time 10 20 30 40 50-1 1 2 3 4 5 C, I, Y time 10 20 30 40 50-0.2 0.2 0.4 0.6 0.8 1 1.2 Labor, Wages time 10 20 30 40 50-0.02-0.01 0.01 0.02 0.03 0.04 0.05 Interest Rate time Consumption, Output, Investment, Hours, Real Wages all increase....
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graduate_macro_notes3 - Notes on Graduate Macroeconomics:...

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