Econ110BW11 - Lec10 A - GR_ol

Econ110BW11 - Lec10 A - GR_ol - Macroeconomics B Econ 110B...

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Macroeconomics B Econ 110B–Winter 2011 Prof. Giacomo Rondina Lecture 10
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Plan for Lecture 10 Wrapping up: New Theory of Investment and the q Theory The New IS Monetary Policy and Expectations 2 Financial Markets and Expectations (Ch. 15)
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Investment Decision for the Aggregate Economy Theory () e tt II V + ⎛⎞ ⎜⎟ ⎝⎠ Data: Borrowing Constraint Matters Theory with Borrowing Constraint , e t V + + Π NEW THOERY OF INVESTMENT hat determines profits per unit of capital? What determines profits per unit of capital? 3 Expectations, Consumption and Investment (Ch. 16)
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Profits and Output (Sales) 4 Expectations, Consumption and Investment (Ch. 16)
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Investment Decision for the Aggregate Economy New Theory of Investment () , e tt II V + + ⎛⎞ Π ⎜⎟ ⎝⎠ What determines profits per unit of capital? Sales (Output) t t t Y K + Π =Π Implication: Investment moves with Current and Future Output 5 Expectations, Consumption and Investment (Ch. 16)
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Investment Decision for the Aggregate Economy A Market Based Approach The Tobin’s q Theory q : market value of the firm cost of replacing the firm’s capital q > 1 : Invest o Not Invest 6 Expectations, Consumption and Investment (Ch. 16) q < 1 : Do Not Invest
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Expectations and Investment tt Di i d th St k Mk tTb i’ Investment Decision and the Stock Market: Tobin’s q Example: Company XY 00 machines 50 shares outstanding and $100 of 100 machines, 50 shares outstanding and $100 of debt (bonds outstanding). Price of 1 machine: $1, Price of 1 share in the Stock Market: $2 What is Tobin’s q for this firm? Should the firm invest in new capital? I Iq + ⎛⎞ = ⎜⎟ ⎝⎠ 7 Expectations, Consumption and Investment (Ch. 16)
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Investment Decision and the Stock Market: Tobin’s q 11 2 tt t t II I q q −− + ⎛⎞ =− ⎜⎟ ⎝⎠ 8 Expectations, Consumption and Investment (Ch. 16)
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Expectations: Consumption and Investment Consumption , tt L t t CC W Y T ++ ⎛⎞ =− ⎜⎟ ⎝⎠ Investment ( ) , e t II V Π t Y Π=Π + + t t K + 9 Expectations, Consumption and Investment (Ch. 16)
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Expectations and Economic Activity 1. Expectations and Consumption . pectations and Investment 2. Expectations and Investment
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Econ110BW11 - Lec10 A - GR_ol - Macroeconomics B Econ 110B...

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