Econ+102+lecture+26%2C+4-17-12+-+Beyond+Econ+102 copy

Econ+102+lecture+26%2C+4-17-12+-+Beyond+Econ+102 copy -...

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Lecture 26: Ch. 17 & beyond - Macro and economics from here Econ 102, Winter 2012 4/17/2012 1 Required reading : Ch. 17: pp. 479 - 489
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Outline 4/17/2012 2 1. What have we missed? Three theories of business cycles a. RBC and neoclassical economics b. The political business cycle c. The Minsky cycle 2. What have we missed? Two dimensions of the real world a. Dynamics b. 3. Is there a macro consensus?
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What have we missed?  Business Cycles 4/17/2012 3 The textbook has a definite Keynesian slant Partly Krugman’s bias/preference Partly, because this is perhaps the easiest approach for teaching the “language” and “thought processes” of macroeconomists The book is closer to Neo-Keynesianism : a Keynesian response to the neoclassical critiques presented in the 1970s-1990s There’s more to the world of macroeconomics than Keynesianism! What are some alternate theories of the business cycle?
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What have we missed?  Business Cycles The simplest neoclassical model of business cycles rejects the idea that fluctuations come primarily from AD shocks The Real Business Cycle theory: the idea that changes in the rate of growth of total factor productivity (technological growth) cause fluctuations in SR growth Recall the chapter 9 growth equation (given for China and India): The idea is that sometimes T might increase none, sometimes 5%, etc. In times of fast innovation T 4/17/2012 4 6 . 0 4 . 0 * * = t t t t t t t L HC L K T L rGDP
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What have we missed?  Business Cycles Neoclassical business cycle model: the real business cycle The idea of the RBC model is to explain short run fluctuations with the long-run growth equation Has the appeal of causing the disconnect between our SR and LR models to disappear Has the disadvantage of not working very well on its own as an explanation of aggregate P & rGDP fluctuations For example, still need to assume a non-vertical SRAS (i.e., SR price or wage stickiness) to fit the data. 4/17/2012 5
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What have we missed?  Business Cycles Another theory is the political business cycle : bus. cycles are largely generated by political/presidential politics Ie, it is not a “naturally economic” phenomenon, but politically driven Two versions: 1. Krugman’s version: people vote based on recent rGDP growth, so presidents & Congress stimulate growth in election years to keep their party in power - Pay the price in inflation and contraction in later years - Election years should have fast growth and low 4/17/2012 6
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What have we missed?  Business Cycles Version 2: take as a fact that the Republicans’ base is more wealthy, the Democrats’ is more poor, unionized, etc. Then Democrats will tend to implement policies that
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Econ+102+lecture+26%2C+4-17-12+-+Beyond+Econ+102 copy -...

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