“understanding real business cycles” by charles i. plosser presented by: lizzie dies wade letter...
TRANSCRIPT
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“Understanding Real Business Cycles”
by Charles I. Plosser
Presented by: Lizzie Dies Wade Letter Adam Vande Zande
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Key Questions Addressed • Can current shocks have implications for future decisions
and/or outcomes?
• What different factors does RBC look at compared to other methods?
• How close does the model get to actual data?
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Main Points• Focuses of Neoclassical vs. ISLM vs. Real Business Cycle
• Model can be accurate with some variables but off with others
• Difference – Real Business Cycles look at productivity shocks and other variables
• Neoclassical precursor for RBC
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Outline of the Presentation• Background Information• Neoclassical Model• Robinson Crusoe• Productivity Disturbances• Economic Growth & Business Cycles• Real Business Cycles 1954-1985• Model Data• Productivity Shift Graphs• Real Business Cycle Research
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Background Information
• 1960s & 1970s• Keynesian model vs. Business Cycles• “Idealized state of dynamic equilibrium”• Transform into more neoclassical
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Neoclassical Model• Most basic model of economic dynamics• Benchmark model• Simple economic environment to consider• Households live forever• Utility of each agent is function of consumption & leisure• Maximize utility F(C,L)
• Labeled a “real business cycle model”
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Robinson Crusoe• Crusoe’s choice problem is to maximize his lifetime utility • If there were no productivity disturbances…• Model imposes resource constraints • C + I ≤ Y• L + N ≤ 1• C, L, N, K, I are all positive
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Robinson Crusoe (cont.)
• First Order Conditions
• Linearize (approximations)
• Constant Parameters α = .58; ᵦ = .95; ᵹ = .10
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Productivity Disturbances• Observes a temporarily high value of productivity…• Consume more output in current period• Also value future consumption and leisure
• Temporary vs. Permanent• Temporary - substitution current for future work, and
current consumption for leisure, wealth higher, higher output, consumption and leisure in the future
• Permanent - raise wealth, less incentive to increase investment, more incentive for current consumption, less incentive to work harder today
• Output and consumption are likely to be correlated• Government actions?
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Economic Growth & Business Cycles
• Neoclassical model of capital accumulation predicts that per capita values of output, capital and consumption will converge to constants.
• Solow – major factors• Nelson and Plosser argue that real per capita output behaves
as if they have random walk components. They also argue that Solow’s technology series behaves like a random walk.
• The fact that productivity grows over time raises additional complications
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Productivity Shifts• Need to obtain some measure of the productivity shocks.• Figure 1 is the annual percentage rate of change in technology.
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Real Business Cycles 1954-1985
• Simple neoclassical model described earlier is clearly an incomplete model of the U.S. Economy.
• Table 1 highlights some of the statistical properties of postwar business fluctuations.
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Real Business Cycle Research• Multi-Sector Extension
• Labor Markets
• Endogenous Growth
• Money
• Strategies
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Conclusions• Basic framework of RBC is the neoclassical model
• The model is accurate for some variables but not others
• Real technology shocks have occupied the central focus, but other shocks are being studied
• Real business cycle theory is still in its infancy
• Much work remains before economists have a full understanding of RBC