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325_Lecture23_April25

325_Lecture23_April25 - THE FINANCIAL ACCELERATOR FINANCIAL...

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1 T HE F INANCIAL A CCELERATOR: F INANCIAL M ARKETS AND THE M ACROECONOMY A PRIL 25, 2011 April 25, 2011 2 F INANCIAL A CCELERATOR Introduction “Financial accelerator” framework The most widely-used and applied framework in macroeconomic theory and policy for thinking about financial markets Developed in series of studies by Bernanke, Gertler, and Gilchrist in late 1980’s and early 1990’s Popular-press language “Financial accelerator” “Financial feedback loops” “Loan spirals” Describes well many of the financial-macroeconomic linkages underpinning the dynamics of The Great Depression Current macroeconomic conditions Will develop idea in context of firm theory (Chapter 6) Can also develop idea in context of consumer theory (Chapter 3, Chapter 4, Chapter 8) Recall “credit constraint” analysis of consumption/savings decisions (Chapter 3 and 4)
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2 April 25, 2011 3 O UTLINE OF F RAMEWORK Introduction Major ideas underlying Financial Accelerator Framework 1. Firms’ financial assets (i.e., stocks and bonds) matter for their ability to purchase physical assets (i.e., machines and equipment) 2. Market prices of financial assets matter for firm financing constraints 3. Government regulation affects the linkage between financial markets and real (i.e., goods and physical capital) markets through financing constraints April 25, 2011 4 O UTLINE OF F RAMEWORK Introduction Four Building Blocks of the Financial Accelerator Framework 1. Two-Period Model of Firm Profit Maximization Based on Chapter 6 Enriched to allow for both physical assets (machines and equipment) and financial assets (stocks and bonds) 2. Financing Constraint Quantity of physical capital firms can purchase depends on the market value (i.e., price x quantity) of their financial assets Reflects market and regulatory structures designed to mitigate informational asymmetries (Recall basic Chapter 6 theory of firms featured no constraints on firm profit maximization) 3. Government Regulation/Oversight of Financial Relationships 4. Relationship between Firm Profits and Dividends
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3 April 18, 2011 5 E NRICHING THE B ASIC F IRM T HEORY Model Structure Timeline of events Notation k 1 : capital used for production in period 1 (decided upon in “period 0”) n 1 : labor used for production in period 1 w 1 : real wage rate for labor in period 1 ( w 1 = W 1 / P 1 ) i : nominal interest rate (between period 1 and period 2) P 1 : nominal price of output produced and sold by firm in period 1 AND nominal price of one unit of capital bought by the firm in period 1 for use in period 2 a 0 : real wealth (stock) holdings at beginning of period 1/end of period 0 S 1 : nominal price of a unit of stock in period 1 D 1 : nominal dividend paid in period 1 by each unit of stock held at the start of period 1 The “definining features” of stock April 18, 2011 6 Timeline of events Notation k 2 : capital used for production in period 2 (decided upon in period 1) n 2 : labor used for production in period 2 w 2 : real wage rate for labor in period 2 ( w 2 = W 2 / P 2 ) i :
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