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November 26, 2009
Thanksgiving
Posted by bparke at 03:23 AM | Comments (0)
November 24, 2009
Discussion of Homework, Etc.
Posted by bparke at 03:24 AM | Comments (0)
November 19, 2009
Class Cancelled
Posted by bparke at 10:21 PM | Comments (0)
November 17, 2009
Fixed Exchange Rates
Fiscal policy. The graph on the right shows how both curve move together so we do not actually ever get to point B.
Monetary policy.
A foreign recession.
Devaluation from below or above y-bar.
Posted by bparke at 03:15 AM | Comments (0)
November 12, 2009
Floating Exchange Rates
An increase in y-bar:
Changes in p shift both curves (to point B). Changes in s move just the IS curve, getting both to end up at point C.
Short-run:
A drop in the world interest rate:
Posted by bparke at 03:14 AM | Comments (0)
November 10, 2009
Getting Started
We took up a variety of topics to get started with floating and fixed exchange rates.
Shift the IS curve in a closed economy model.
Shift the LM curve in a closed economy model. (This is "lower P," but "higher M" looks the same.)
An effort to explain how "shift the curve" works for the first equation on page 111. (You had to be there.)
Think of changes in x2 as changes in a composite intercept. (Picture from lecture on 11/12.)
An increase in y-bar:
Posted by bparke at 10:22 PM | Comments (0)
November 05, 2009
Balance of Payments and NIPA Accounting
You can study data on these variables at the BEA (Bureau of Economic Analysis) web site. In class, we studied a balance of payments table.
Posted by bparke at 07:16 PM | Comments (0)
The Basic Model
The model on the left has five equations based economic theory, accounting identities, and definitions. Thinking about the equilibrium and how it changes would be difficult given the algebraic complexities of these equations.
Therefore, we will work with linearized versions, where lower-case letter denote logarithms of upper-case variables. The linearized model is on the right.
The definition of the real exchange rate (1) has an exact equivalent in logs. Uncovered interest parity (2) in logs requires just the one approximation that log(1+x) is approximately x for small x. The definition of the real interest rate (3) uses the same approximation in the form that the rate of inflation is approximately the difference over time of the log of the price level. The LM equation (4) and the IS equation (5) both replace the unspecified functions on the right with linearized versions in logs. The net exports function, for example, does not appear in the linearized IS equation, but the logs of the real exchange rate and foreign income do. Changes in the latter variables affect y via an implicit path involving net exports.
The model on the right has the advantage that we will be able to figure out what happens when a variable changes.
We have six endogenous variables (not counting expectations!), but only five equations. We need an extra equations (and a theory of expectation formation). The extra equation could be we are already at full employment or that the price level is fixed. The former is a long run view while the latter is more short run.
Posted by bparke at 06:57 PM | Comments (0)
The Basic Model - Another View
The 9:30 lecture provides another view.
Posted by bparke at 06:12 PM | Comments (0)
Logarithms
The Basic Model uses the property that log(1+x) is approximately equal to x if x is near zero. Changes in logs of a varible are very nearly equal to the percentage changes.
Posted by bparke at 05:19 PM | Comments (0)
The Basic Model
Posted by bparke at 03:14 AM | Comments (0)
November 03, 2009
Exchange Rates
When bond prices go up, bond yields go down. This happens because the future payments are fixed.
Posted by bparke at 03:01 AM | Comments (0)