204A-slides03e

204A-slides03e - (204A -3e)-P.1 Fiscal Policy: I....

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(204A -3e)-P.1 Fiscal Policy: I. Government Spending • Assumption: Public spending G per efficiency unit of labor. - Assume spending is tax-financed: T=G, lump-sum. - Here abstract from productivity and population growth (could be added) - Best interpret as government consumption. [Public capital would require different model.] • Resource constraint per-capita: G c k k f k ! ! ! = " ) ( ! - Phase diagram with c(k)-line: G k k f k c ! ! = ) ( ) ( . Higher G shifts the c(k)-line down. • Preferences: utility over private consumption dt c u e U t ) ( 0 ! = " # $ . - Treat public spending as exogenous. (Standard macro view. Endogenous in public finance.) => Hamiltonian: H ( c , k , ! , t ) = e " # t u ( c ) + !$ [ f ( k ) " % k " c " G ] - Note: G enters only into the constraint => Same Euler equations as without government. ) ) ( ' ( ) ( 1 $ $ = k f c c C ! - Steady state conditions: 0 = k ! => c * = f ( k * ) ! k * ! G * 0 = c ! => f ' ( k * ) = + - Implied phase diagrams: Fixed k * -line. Shifts in c(k)-line whenever G(t) changes.
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(204A -3e)-P.2 Application #1: Permanent Increase • Find: Instant jump to the new steady state. Government spending has no impact on capital stock, no impact on the interest rate, crowds out private consumption one-for-one.
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(204A -3e)-P.3 Application #2: Temporary Increase • Graphs: See Romer Fig.2.9 (next slide) • Key idea: Follow different “arrows” phase diagrams as time passes. -
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204A-slides03e - (204A -3e)-P.1 Fiscal Policy: I....

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