325_Lecture15_March28

325_Lecture15_March28 - SHOCKS MARCH 28, 2011 Introduction...

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1 S HOCKS M ARCH 28, 2011 March 28, 2011 2 B ASICS Introduction ± Shock/shifter ± Definition : Some unexpected event that affects economic fundamentals and hence decisions, but which is unexplained or unexplainable ± Introducing shocks into our frameworks (consumption-leisure, consumption-savings, infinite-period) will “get them moving”
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2 March 28, 2011 3 B ASICS Introduction ± Shock/shifter ± Definition : Some unexpected event that affects economic fundamentals and hence decisions, but which is unexplained or unexplainable ± Introducing shocks into our frameworks (consumption-leisure, consumption-savings, infinite-period) will “get them moving” ± Will consider (for now) two types of shocks ± Total Factor Productivity (TFP) Shocks –unexpected changes in A t in the production function A t f ( k t , n t ) ± Preference Shocks –unexpected changes in representative consumer ’s utility function; causes rotations of indifference maps k t n t A t f(k t ,n t ) A t f(k t ,n t ) rise in A fall in A rise in A fall in A “SUPPLY SHOCK” “DEMAND SHOCK” March 28, 2011 4 TFP IN C OBB- D OUGLAS P RODUCTION F UNCTION TFP Shocks ± Revisit the commonly-used functional form in modern quantitative macroeconomic analysis ± Describes the empirical relationship between aggregate output, aggregate capital, aggregate labor, and level of sophistication of technology (TFP) ± (How to measure TFP in Chapter 13) ± Cobb-Douglas form useful for illustrating effects of TFP shocks 1 output ( , ) ttt t t t t Afkn A kn D ±
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3 March 28, 2011 5 TFP IN C OBB- D OUGLAS P RODUCTION F UNCTION TFP Shocks ± Revisit the commonly-used functional form in modern quantitative macroeconomic analysis ± Describes the empirical relationship between aggregate output, aggregate capital, aggregate labor, and level of sophistication of technology (TFP) ± (How to measure TFP in Chapter 13) ± Cobb-Douglas form useful for illustrating effects of TFP shocks ± Unexpected change (i.e., a shock) in A t ± Causes change in marginal product of labor ± Causes change in marginal product of capital 1 output ( , ) ttt t t t t Afkn A kn D ± output (,) ( 1 ) t t tn t t t t tt mpn f k n k n n AA ± w ± w 11 output t tk t t t t t mpk f k n k n k ± ± w w Recall mpn is foundation for labor demand Recall mpk is foundation for capital/investment demand March 28, 2011 6 TFP S HOCKS AND L ABOR D EMAND ± Firm-level demand for labor defined by the relation (1 ) ( ) t t t wk n m p n A DD ± ± ) t t t t k n A w §· ± ¨¸ ©¹ Because exponent (- Į ) is a negative number, can move to denominator labor real wage D rise in A fall in A
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4 March 28, 2011 7 TFP S HOCKS AND L ABOR D EMAND TFP Shocks ± Firm-level demand for labor defined by the relation ± IMPORTANT : TFP shocks shift the labor demand curve (1 ) ( ) tt t t t w k n mpn A DD D ± ± ) t t t t k n A w §· ± ¨¸ ©¹ Because exponent (- Į ) is a negative number, can move to denominator labor real wage D rise in A fall in A Firm-level labor demand function Aggregate-level labor demand function labor real wage D rise in A fall in A Sum over all firms March 28, 2011 8
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325_Lecture15_March28 - SHOCKS MARCH 28, 2011 Introduction...

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