Barro&Serletis-Chp8-Slide

Consump on might rise or fall because of the weak

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Unformatted text preview: ed workers in Canada)? 14 •  Real Rental Price –  Predic-on: the real rental price of capital, R/P, will be rela-vely high in booms and rela-vely low in recessions. –  Rental price is difficult to measure for the whole economy given that most capital are not explicitly rent out because they are typically used by their owners. •  Interest Rate –  Predic-on: booms will have a high interest rate, i, whereas recessions will have a low interest rate. –  The paNern of data looks right – procyclical. 15 Temporary Changes in the Technology Level Example: a decrease in A due to a harvest failure or a general strike would be temporary. Suppose that the change in A is temporary. •  If A increases temporarily, real GDP s-ll rises for fixed values of K and L. •  The marginal product of capital, MPK, and the interest rate, i, also rise as before. •  The intertemporal ­subs-tu-on effect from the higher i s-ll mo-vates households to reduce current consump-on, C, and raise current real saving. •  There are some new results about income effects: 16 •  The model predicts that economic boom would feature high real GDP and investment. –  Consump-on might rise or fall, because of the weak income effect; we assume that Ct would rise by, at most, a small amount. Hence, net investment, rises by nearly as much as – or possibly by even more than – real GDP. –  The model therefore predicts that an economic boom would feature high real GDP and investment. •  A recession would have low real GDP and investment. –  Ct would decline by a small amount. •  Thus, if the underlying shocks were purely temporary, the model would not explain the behavior o...
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