14.33 Research Plan Introduction Traditional macroeconomic models have generally focused on how specific sources of market imperfections can be used to explain various macroeconomic phenomena. While many of them are able to effectively illustrate potential avenues of macroeconomic fluctuation, they are often not easily extendable to accommodate other sources of variation as well. This inflexibility means that choosing a model requires implicitly making specific discreet structural assumptions about the economy we hope to model. This paper seeks to develop a macroeconomic model that can explicitly illustrate the impact of multiple kinds of economic rigidities in a common framework. By doing so it hopes to avoid having to make specific structural assumptions about the economy; instead allowing for a continuous calibration of the model to a wide range of circumstances. I will begin by giving a preliminary description of the model I hope to develop. Following which I will briefly describe the methods I will use in development and empirical testing. Finally, I will give a description of the data I will use and the kind of results I hope to achieve with it. Description of Model The key difference in this model is that, rather than implicitly modeling market behavior by changing constraints on optimizing agents, we explicitly model the market as an agent itself and specify its behavior interface with regard to the rest of the agents. In its basic form, the model consists of a continuum of workers with no initial wealth who can produce output 0 < y < ymax, and another agent who represents the market with initial capital C. The model is dynamic in discreet time and has two distinct stages within each time period... ... middle of paper ... ...mpts to describe fluctuations and not growth, the data will have to be detrended before use. The other data we need would comprise on information on changes in a country’s market imperfections. This would consist of events such as the gas price controls or sudden changes in expectations brought about by burst bubbles. This would allow an empirical versus model response comparison. Results There are three main objectives this paper hopes to achieve: Firstly, it seeks to develop of a model that can successfully emulate the qualitative Implications of different traditional macroeconomic models. Secondly, it hopes find combinations of different imperfections that allow the emulation of real world macroeconomic data. Finally, it seeks to successfully test the viability of the model in predicting the implications of changing market imperfections.
It was previously assumed that economic investors and regulators (agents) utilised all available information and thus market prices were a reflection of this information with assets representing their fundamental value, encouraging the position that agents’ actions were rational. The 2007-2008 Global Financial Crisis (GFC) is posited to have originated from the notion that all available information was utilised, causing agents to fail to thoroughly investigate and confirm “the true values of publicly traded securities,” leading to a failure to register the presence of an asset price bubble preceding the GFC (Ball 2009).
The continuous internationalization of capital markets has risen the concern about its implications on conducting macroeconomic policies (Pilbeam, 2013, p.74). A possible predicament is the impossible trinity, or the tenet that a country can only pursue two of the following three options: perfect capital mobility, fixed exchange rates, or autonomous monetary policy (Shambaugh, 2004, p. 302). Nevertheless, as of September 2011, Switzerland has attempted to pursue all three options, by continuing an expansionary monetary policy after adopting an exchange rate floor of 1.20 CHF per euro (IMF, 2013, p. 5). In theory, this policy should be rendered ineffective given Switzerland’s perfect capital mobility and its fixed exchange rate system (Mundell, 1963, p. 484). Nevertheless, Swiss real GDP still increased between the implementation of the floor in 2011 and the termination of the monetary expansion in 2012 (OECD). The aim of this paper is to elaborate on this inconsistency using the Mundell-Fleming model. First, the structure of the model and its assumptions are explained, as well as the characteristics of Switzerland’s economy that are relevant to perform the analysis. Subsequently, the course of events in Switzerland from 2010 until 2012 will be analyzed and finally discussed in the conclusion.
The state of the economy is important both on a micro and macroeconomic level. On a macro level, those in government pay close attention to these statistics in order to guide fiscal and monetary policy. On a micro level, households can use this data to guide their consumption and investments, while businesses can use this information in their strategic planning. In looking at economic information, there is current data, historical data, and economic forecasts. This enables decision makers to get a more complete picture of economic trends and see the relationship between various economic indicators.
A theme that dominates modern discussions of macro policy is the importance of expectations, and economists have devoted a great deal of thought to expectations and the economy. Change in expectations can shift the aggregate demand (AD) curve; expectations of inflation can cause inflation. For this reason expectations are central to all policy discussions, and what people believe policy will be significantly influences the effectiveness of the policy.
McKibbin, W.J., A. Stoeckel (2009), “Modelling the Global Financial Crisis. Centre for Applied Macroeconomic Analysis,” The Australian National University, Working Paper 25/2009.
When a recession does not occur, it can be concluded that the economy is not experiencing a true business cycle but is in a continuous expansion. The rate at which the economy is evolving can be assesse...
In conclusion, regardless of Macropoland’s current economic condition, it is fair to say that it is all part of the business cycle. The business cycle has three parts: peak, trough, and peak. The peak is the date that the recession starts. In Macropoland’s case, the peak would be at the beginning of 1973, its trough somewhere between 1973 and 1974, and then its peak again at 1974. In the second scenario, Macropoland is either at its trough, where it is about to head up again because of its low inflation rate, or it is at its expansion, on its way to heading to its next peak.
...el, 2003. The Efficient Market Hypothesis and Its Critics, Journal of Economic Perspectives, Vol. 17, No. 1, Winter 2003, pp. 59-82.
“Microeconomics and macroeconomics can be described in terms of small-scale vs. large-scale or in terms of partial vs. general equilibrium. Perhaps the most important distinction, however, is in terms of the role of equilibrium. While issues in microeconomics seldom challenge the notion of a naturally occurring equilibrium, the existence of business cycles and, especially, unemployment suggests too many observers that macroeconomics raises issues of a different character.” (McConnell & Brue, 2004).
Kroon, George E. Macroeconomics The Easy Way. New York: Barron’s Educational Series, Inc., 2007. Print.
In contrast, the Keynesian Economic Theory was presented in the 1930's, during the Great Depression, by a man named John Maynard Keynes (Classical vs. Keynesian). It relies on spending and aggregate demand which makes this theory demand driven. These economists believe that aggregate demand is influenced by public and private decisions. The public means the government, and the private means individuals and businesses. Aggregate demand sometimes affects production, employment, and inflation. When the economy starts to slack, they rely on the government to build it back up.
The economy in the United States was recently experiencing what is now called the Great Recession which occurred from December of 2007 to June of 2009. During this recession we experienced a decrease in our gross domestic product and experienced an increase to our unemployment. Since 2003 the American economy has been seen inflation rates as low as .1% in 2008 and as high as 4.1% in 2007. Rates such as these detail the increase and decrease in prices of products throughout the economy and has a considerable influence on the supply and demand of goods from cars to bread. In the past ten years inflation rates have continually seen positive values w...
Rittenberg, L. and Tregarthen, T. (2012). Macroeconomics Principles V. 2.0. Licensed under Creative Commons by-nc-sa 3.0 (https://creativecommons.org/licenses/by-nc-sa/3.0/)
Macroeconomics is the study of the economy as a whole, which looks at economic growth, unemployment and inflation. (Dobson and Palfreman, 1999) Government macroeconomics objectives can dividend into
The primary purpose or goal of EC is to explain the economic system of a country as a whole. The model answers the central question of what a country's economic growth projections are. Some other problems embedded in the issue that the model is trying to explain is- What are the imports