Econ 208
Marek Kapicka
Lecture 1
Introduction
What is this course about?
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Analysis of macroeconomic policies
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Government Spending
Taxation and government debt
Monetary policy
Banking and financial intermediation
We will use micro-founded
macroeconomic models to study those
issues
Administration
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Classes: MW 9:30-10:45
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My email: [email protected]
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Office hours: TTh 10:30-11:30, NH
3052
Course homepage:
http://econ.ucsb.edu/~mkapicka/E208.html
Administration
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TA
Xintong Yang ([email protected])
TA sessions: Thursdays 3:00-3:50 & 4:00- 4:50
GIRV 1116
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Textbook
Macroeconomics, by Matthias Doepke, Andreas
Lehnert, and Andrew Sellgren
Administration
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5 problem sets
4 best ones count
25 % of the final grade
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Midterm (May 6, in class)
No make-up
25 % of the final grade
Closed book, closed notes
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Final (June 12, 9-11)
50 % of the final grade
Closed book, closed notes
Outline of the course
1.
2.
Introduction: A basic framework
Government Policies
1.
2.
3.
4.
The Effects of Government Spending
Government Taxation and Government
Debt
Monetary Policy
Banking and Financial Intermediation
Per Capita Real GDP (in 2000 dollars) for the United
States, 1900-2008
Growth rates
yt
gt 
1
yt 1
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If gt is small,
gt  ln( 1  gt )  ln yt  ln yt 1
Natural Logarithm of Per Capita Real GDP
The Great Recession
1981-1982 Recession
1. US GDP, Consumption, and Government
Expenditures
2. Total Taxes (black line) and Total Government
Spending (colored line) in the United States, as
Percentages of GDP
2. Recent Recession: Fiscal Policy
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2009 Fiscal Stimulus:
$787 billion (~5.5% of GDP)
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Tax cuts: $288 billion
Spending on
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Healthcare & Education: $238 billion
Infrastructure: $81 billion
4. US History of banking crises
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Before 1914: Crises were a frequent
phenomenon in the U.S.
National banking era 1863-1913
They have occurred at about 10 year
intervals
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1873,1884,1890,1893,1896,1907,1914
U.S. National Banking Era Panics
2. How do we study macro?
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We cannot run experiments in
macroeconomics, so we need to construct
models to be used as laboratories
Prague
A map of Prague
A map of Prague subway
How do we study macro?
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A good model:
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Simplified, abstract, representation of
reality
Omits many details, represents only
essential features needed to answer a
specific question
helpful to make predictions
should be simple, but they need not be
realistic.
2.1 Structure of a typical model
Households
Choose consumption,
saving, labor supply
Firms
Choose production,
investment, labor demand
Markets
Prices such that
Supply = demand
2.1 Structure of a typical model
Description of goods in the economy
Consumers
1.
2.
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Firms
3.
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4.
preferences over goods
technology available to produce the goods
The resources available
2.2 Prediction of a Model
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Individual behavior
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people behave rationally (optimize)
firms maximize profits
Equilibrium behavior
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competitive equilibrium
2.3 Microeconomic Foundations
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The Approach
1.
2.
Start with consumers and firms making
decisions at individual level
Aggregate them up
Representative Consumer Assumption
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Example: Benefits of this Approach
1.
Monetary Policy
A Basic Intertemporal Model
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A simple model where people choose
how much to consume and how much
to save
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A) Consumer Optimization
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B) Market Clearing
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C) Adding capital stock
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D) Welfare Theorems
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E) Infinite horizon
A Basic Intertemporal Model
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First period = current period
Second period = future period
To simplify, abstract from labor/leisure
decision
Our interest: borrowing and saving by
consumers
A Basic Intertemporal Model
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Preferences of consumers
U (c1 )  U (c2 )
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U(c) is increasing, differentiable and concave
Discount factor β<1 measures how much
future utility matters relative to current utility
A Basic Intertemporal Model
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Budget Constraints:
c1  b1  y1
c2  y2  b1 (1  r )
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y1, y2 are exogenous incomes
b1 are savings from period 1 to period 2
r is the interest rate
Consumer’s optimization
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Consumers maximize utility subject to
budget constraints
max U (c1 )  U (c2 ) s.t c1  b1  y1
c1 ,c2 ,b1
c2  y2  b1 (1  r )

Lagrangean
L(c1 , c2 , b1 , 1 , 2 )  max U (c1 )   U (c2 )
c1 , c2 ,b1
 1 ( y1  c1  b1 )
 2 ( y2  b1 (1  r )  c2 )
Consumer’s optimization
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First order conditions
U (c1 )  1
U (c2 )  2
1  2 (1  r )
Euler Equation
U (c1 )  (1  r )U (c2 )
A) Consumer’s optimization
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Log utility:
c2
 (1  r ) 
c1
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Solution:
y2
y1 
1 r
c1* 
1 
b1*  y1  c1*
Where are we?
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A Basic Intertemporal Model
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A) Consumer Optimization
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B) Market Equilibrium
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C) Adding capital stock
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D) Welfare Theorems
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E) Infinite horizon
B) Market Equilibrium
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Suppose that there is N identical agents
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Market clearing condition is
Nb (r )  0
*
1
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Log utility:
*
y2
y1 
1 r
y1 
1 
1 y2
*
r 
 y1