Chapter 15 Real Business Cycle Theory 友学经济学院
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summary Some facts in business-cycle Real-business-cycle theory's explanation to some important economic variables O Explanation to the fluctuations of output, consumption investment O Explanations to employment fluctuation O Explanations to monetary fluctuation Evaluation to Real-business-cycle theory 友学经济学院
summary ❖ Some facts in business-cycle ❖ Real-business-cycle theory’s explanation to some important economic variables Explanation to the fluctuations of output, consumption & investment Explanations to employment fluctuation Explanations to monetary fluctuation ❖ Evaluation to Real-business-cycle theory
15. 1 Some Facts in Business-Cycle 2 Fountainhead of Real-business-cycle theory o In 1980S, many papers give explanations to economic fluctuations by real impacts instead of monetary impacts o Representative economists: EDWORD. PRESCOTT, FENE KIDLANT CHARLES PROSE. JOHN LONG ROBERT KinG ROBERT BARO o Kiddland-Prose's paper Time to Build and Aggregate Fluctuations ) in 1982 begin to form the model 友学经济学院
15.1 Some Facts in Business-Cycle ❖ Fountainhead of Real-business-cycle theory In 1980’s，many papers give explanations to economic fluctuations by real impacts instead of monetary impacts. Representative economists: EDWORD.PRESCOTT, FENE.KIDLANT, CHARLES.PROSE, JOHN.LONG, ROBERT.KING & ROBERT.BARO. Kiddland-Prose’s paper《 Time to Build and Aggregate Fluctuations》in 1982 begin to form the model
15.1 Some Facts in Business-Cycle .s Characters of Real-business-cycle theory o New developments of new classical economics, inherited most of the micro assumption.(1) use equilibrium method to construct macroeconomic model;(2) adapt the hypothesis of " rational anticipation O Different from traditional classical theory, attach much importance to supply instead of monetary fluctuation. The theory argues that real impacts(for example technology evolution, policy change and natural disaster) are the origin of economic fluctuation 友学经济学院
15.1 Some Facts in Business-Cycle ❖ Characters of Real-business-cycle theory： New developments of new classical economics, inherited most of the micro assumption.（1）use equilibrium method to construct macroeconomic model；（2）adapt the hypothesis of “rational anticipation”. Different from traditional classical theory, attach much importance to supply instead of monetary fluctuation. The theory argues that real impacts (for example technology evolution, policy change and natural disaster) are the origin of economic fluctuation
15.1 Some Facts in Business-Cycle Business cycle is similar, and the time series data express common rules, which includes o Output fluctuations are related to each other through different departments with time serial relation; o Industry product, consumption and investment fluctuate simul taneously with cycle, and also the government buy o Investment changes much more severely than consumption; O Employment is with the cycle while unemployment is against cycle o Real wage and average productivity is with the cycle, and the former is only slightly; o Currency supply and stock price is with cycle and lead other elements; o Inflation and nominal interest is with cycle and lag o Real interest is not seasonal 友学经济学院
15.1 Some Facts in Business-Cycle ❖ Business cycle is similar, and the time series data express common rules, which includes : Output fluctuations are related to each other through different departments with time serial relation； Industry product, consumption and investment fluctuate simultaneously with cycle, and also the government buy； Investment changes much more severely than consumption； Employment is with the cycle while unemployment is against cycle； Real wage and average productivity is with the cycle, and the former is only slightly； Currency supply and stock price is with cycle and lead other elements； Inflation and nominal interest is with cycle and lag； Real interest is not seasonal
15.2 Real-Business-Cycle Theory's Explanation to Important Economic Variables o Explanations to the fluctuations of output, consumption investment o Use simplified"Ramsey-Cass-Coopmans"model to analyze 2 Object functions max EU=El2Bu(CtI .tY=f(K)=C+l,K=l+()Kt u>0,u”0,f"<0 友学经济学院
15.2 Real-Business-Cycle Theory’s Explanation to Important Economic Variables ❖ Explanations to the fluctuations of output, consumption & investment Use simplified “Ramsey-Cass-Coopmans” model to analyze ： ❖Object functions： t t t t t 1 t t t i 0 i t t s.t.Y f(K ) C I ,K I (1 )K max E U E [ u(C )] = = + = + − = + = u 0,u 0;f 0,f 0
15.2 Real-Business-Cycle Theory's Explanation to Important Economic Variables .fo.c: u(C1)=B·E{u'(Ct)[f(K)+(1-o) & TVC limelBTu' (ChiK+=0 友学经济学院
15.2 Real-Business-Cycle Theory’s Explanation to Important Economic Variables ❖ F.O.C： ❖ TVC： u'(C ) E {u'(C ) [f'(K ) (1 )]} t = t t+1 t+1 + − limE [ u'(Ct i )Kt i 1 ] 0 t i t i + + + = + →
15.2 Real-Business-Cycle Theorys Explanation to Important Economic Variables Solve the problem o assumption Utility function u(Ct)=InC > Product function f(K=A, K > Depreciation ratio 8=1 ● calculate the equation: C1=·AK和K=aB.A1K 友学经济学院
15.2 Real-Business-Cycle Theory’s Explanation to Important Economic Variables ❖ Solve the problem ⚫assumption： » Utility function » Product function » Depreciation ratio δ=1 ⚫calculate the equation： t t u(C ) = lnC t = At Kt f(K ) Ct At Kt Kt 1 At Kt = = 和 +
15.2 Real-Business-Cycle Theory's Explanation to Important Economic Variables Brigg,s logarithm, we get k:1=a·kt+a1 Simplify the equation again yt=·yt1+at C+=·c41+a 友学经济学院
15.2 Real-Business-Cycle Theory’s Explanation to Important Economic Variables ❖ Brigg's logarithm，we get： ❖ Simplify the equation again： t 1 t t k = k + a + t t-1 t c = c + a t t-1 t y = y + a
15.2 Real-Business-Cycle Theory's Explanation to Important Economic Variables at=pat-1+E,p<1 (AR1),then investment, output and consumption will prove to be(AR2) o In another word, real impacts will affect the output permanently 友学经济学院
15.2 Real-Business-Cycle Theory’s Explanation to Important Economic Variables ❖ If （AR1），then investment, output and consumption will prove to be（AR2） ❖ In another word，real impacts will affect the output permanently. at = at−1 + t , 1