the keynesian model lecture 4: introduction to keynesian model: derivation; national saving...
TRANSCRIPT
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THE KEYNESIAN MODEL
Lecture 4: Introduction to Keynesian Model:Derivation; National Saving Identity.
Lecture 5: Multipliers for spending & exports; the transfer problem.
Lecture 6: Large-country model; International transmission under fixed vs. floating exchange rates
Lecture 7: Adjustment of a CA deficit via expenditure-reducing vs. expenditure-switching policies
Lecture 8: Monetary factors
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Imports & exports depend on income:
Y
TB
+ 0 -
),( YEMM d *),( YEXX dmYM X
)( mYMXTB
as does consumption: Keynesian consumption function cYCC
assuming E & Y* fixed, for now.
where slope = -m ≡ - marginal propensity to import
TB falls in expansions…
…and rises in contractions
API-120 - Professor Jeffrey Frankel, Harvard University
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Trade balance rises in recessions,
API-120 - Professor Jeffrey Frankel, Harvard University
falls in expansions
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Determination of equilibrium incomein open-economy Keynesian model
TBAY )()( MXGIC
)()( mYMXGIcYC
MXGICmYcYY
mc
MXGICY
1
ms
MXAY
GICA cs 1where and
Now solve:
API-120 - Professor Jeffrey Frankel, Harvard University
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API-120 - Professor Jeffrey Frankel, Harvard University
Derivation of National Saving Identity
Income ≡ Output (assuming no transfers)
Y ≡ GDP
S + (T-G) ≡ I + X – M / /
NS ≡ S + BS ≡ I + TB
NationalSavingIdentity
C + S + T ≡ C + I + G + X -M
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API-120 - Professor Jeffrey Frankel, Harvard University
US National Saving, Investment, & Current Account as Shares of GDP, 1949-2019
Trend:Gap widened,
as NS fellrelative to I
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API-120 - Professor Jeffrey Frankel, Harvard University
Keynesian Consumption Function: dYc CC
)cY C( -Y C - Y S ddd
} I
or, expressed as a saving function:
where s ≡ 1 – c . dY s C-
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API-120 - Professor Jeffrey Frankel, Harvard University
Closed economy: NS – I = 0
Fiscal Expansion
1 < Closed-economy multiplier 1/s < ∞
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Imports: for simplicity
mY Mor , Y)(E,MM d
API-120 - Professor Jeffrey Frankel, Harvard University
Open economy: NS – I = TB = X – M
Exports: for simplicity Xor ),Y(E,XX *d
)( mYMXTB
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API-120 - Professor Jeffrey Frankel, Harvard University
Fiscal Expansion
Gms
Y
1
G
slope = s
Open economy
Gs
1
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API-120 - Professor Jeffrey Frankel, Harvard University
End of Lecture 4: Introduction to the Keynesian Model
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Bussière, Callegari, Ghironi, Sestieri & Yamano, 2013, "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008-2009."
Appendix -- Puzzle: Why did global trade collapse
in the 2008-09 global recession?(more than usual)
2009
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API-120 - Professor Jeffrey Frankel, Harvard University Bussière, Callegari, Ghironi, Sestieri & Yamano, 2013,
"Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008-2009."
One answer: There is a marginal propensity to import out of investment, greater than the marginal propensity to import by consumers.
And investment fell much more than consumption in 2008-09.