Transcript Chapter 11

Chapter 11
Market-Clearing
Models of the
Business Cycle
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Study Three Market-Clearing
Business Cycle Models
• Real Business Cycle Model
• Segmented Markets Model
• Keynesian Coordination Failure Model
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Real Business Cycle Model
• Business cycles are caused by fluctuations in
total factor productivity.
• There is no role for the government in
smoothing business cycles – cycles are just
optimal responses to the technology shocks.
• Model fits the data well.
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Figure 11.1 Solow Residuals
and GDP
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Figure 11.2 Effects of a Persistent
Increase in Total Factor Productivity in
the Real Business Cycle Model
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Figure 11.3 Average Labor Productivity
with Total Factor Productivity Shocks
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Table 11.1 Data Versus Predictions of
the Real Business Cycle Model with
Productivity Shocks
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Figure 11.4 Procyclical Money Supply in
the Real Business Cycle Model with
Endogenous Money
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Equation 11.1
Cobb-Douglas production function, with labor
share of output of 64%:
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Segmented Markets Model
• Business cycles can be caused in this model by
unanticipated shocks to the money supply.
• Model exhibits a liquidity effect – the interest rate falls
in the short run when the money supply increases.
• Monetary policy can only improve the functioning of
the economy if the central bank has an informational
advantage over the private sector.
• Fit to the data is not as good as with the real business
cycle model.
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Figure 11.5 Effects of an Unanticipated
Increase in the Money Supply in the
Segmented Markets Model
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Table 11.2 Data Versus Predictions of
the Segmented Markets Model with
Monetary Shocks
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Figure 11.6 A Welfare-Improving
Role for Active Monetary Policy
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Figure 11.7 Percentage Deviations from
Trend in Money Supply and GDP
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Figure 11.8 Real and Nominal
Interest Rates
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Figure 11.9 Relative Price of
Energy
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Keynesian Coordination Failure
Model
• Strategic complementarities imply that the aggregate
production function has increasing returns to scale, and
the labor demand function can be upward sloping.
• There can be multiple equilibria.
• In an example, the model fits the data as well as the real
business cycle model.
• GDP fluctuates in the model because of self-fulfilling
waves of optimism and pessimism.
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Figure 11.10 A Production Function
with Increasing Returns to Scale
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Figure 11.11 Aggregate Labor
Demand with Sufficient Increasing
Returns to Scale
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Figure 11.12 The Labor Market in
the Coordination Failure Model
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Figure 11.13 The Output Supply
Curve in the Coordination Failure
Model
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Figure 11.14 Multiple Equilibria in the
Coordination Failure Model
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Table 11.3 Data Versus Predictions of
the Coordination Failure Model
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Figure 11.15 Average Labor Productivity
in the Keynesian Coordination Failure
Model
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Figure 11.16 Procyclical Money
Supply in the Coordination Failure
Model
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Figure 11.17 Stabilizing Fiscal Policy
in the Coordination Failure Model
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