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Introduction
STEADY STATE
!! !! !! Deterministic steady state the natural point of approximation Shut down all shocks and set exogenous variables at their means The idea: let economy run for many (infinite) periods
!! !! Time eventually doesnt matter any more Drop all time indices
&
u n (c , n ) = zFn (k , n ) uc ( c , n )
Introduction
CALIBRATION PHILOSOPHY
!! !! !! An economic model is a measuring device If model makes believable predictions along some important dimensions (i.e., matches some key data) then maybe its predictions are believable along the novel dimensions of the model Getting some partial derivatives of the model in known directions correct may build credibility that its partial derivatives in novel directions are at least not grossly incorrect Make model match some data of interest often long-run (i.e., timeaveraged data) growth facts !! Preferably well-accepted stylized facts !! Solow growth model in the background !! Natural candidate: Kaldor growth facts Calibration vs. Estimation 3
!! !!
!!
!!
Introduction
!!
!! !!
Often start with RBC model that abstracts from long-run growth But true calibration begins with model featuring only long-run growth
!! !! Puts restrictions on instantaneous utility and production forms Use (K1)-(K5) to obtain these restrictions
!!
subject to
Trend productivity is laboraugmenting (Harrod-neutral) (Makes use of fact (K5)) Flow resource constraint Evolution of deterministic component of productivity
Red indicates variables or parameters that will be modified when detrending the model
Ct + Kt +1 " (1 " ! ) Kt = zt F ( Kt , nt X t )
X t = ! X t "1 ,
! #1
!! !!
Suppose zt = 1 always, so only deterministic growth Deterministic dynamics of (Ct, Kt+1, nt, Xt+1) governed by
(1)
un (Ct , nt ) = X t F2 ( K t , nt X t ) uc (Ct , nt )
Labor supply function (aka consumption-labor optimality) Capital supply function (aka consumption-savings optimality)
(2)
(3) (4)
Ct + Kt +1 " (1 " ! ) Kt = F ( Kt , nt X t )
X t = ! X t "1
Normalize X0 = 1
un (Ct , nt ) = X t F2 ( K t , nt X t ) uc (Ct , nt )
(3)
Ct + Kt +1 " (1 " ! ) Kt = F ( Kt , nt X t )
X t = ! X t "1
(2)
(4)
!!
(K1) Capital income share and labor income share of GDP are stationary
And viewing economic profits as zero
# F ( K , nX ) = K ! (nX )1"!
(! $ 0.4)
(2)
" K / Xt # u (C , n ) $ n t t = (1 $ ! ) X t % t & uc (Ct , nt ) ' nt ( ! #1 $ Kt +1 / X t +1 % uC (Ct , nt ) =! & ' +1# " buC (Ct +1 , nt +1 ) n t +1 ) (
(3)
(4)
!!
(K2) All real quantity variables grow at same rate in the long run
"
Yt +1 Ct +1 K t +1 X t +1 = = = =!, Yt Ct Kt Xt
#t
! yt "
!!
Yt = y, Xt
kt "
Kt =k, Xt
!
ct "
Ct = c, Xt
#t
Note long run growth rate affects capital accumulation even in stationary representation!
+1# "
(2)
"k # u (C , n ) $ n t t = (1 $ ! ) X t % & uc (Ct , nt ) ' nt ( ! #1 ) k $ uC (Ct , nt ) =! % & +1# " buC (Ct +1 , nt +1 ) ( nt +1 '
(3)
c + # k $ (1 $ " )k = k ! nt1$!
X t = ! X t "1
(4)
!!
! nt = n
(3)
c + " k $ (1 $ # )k = k ! n 1$!
(2)
+1# "
!! !! !!
!!
!!
STEADY STATE
!! !! Steady state c , n , k
!! !! !!
A dynamic phenomenon!
Not static! Economy is moving exactly along its long-run (i.e., deterministic) growth path Balanced growth path
!!
c = 1.56 mean?
!!
!!
Time use and intertemporal price outcomes within model are interpretable
!! !! Provide calibration targets n is fraction of time spent in paid market work !! Empirical: n ! 0.30
!!
! #1
+1# "
!!
and
#! u (c , n )
t t t t =0
"
ct = Ct/Xt
!!
For this transformed model to deliver same steady state (relative quantities, time use, and r), require
!! Resource constraint
!!
" % b# 1$!
!! !!
Typical assumption ! = 1 omits growth altogether What if trend growth rate fluctuates, !t?
!! !! !!
Typical representation cannot accommodate trend shocks because ! = 1 Trend shocks fairly common in small-open-economy models Affects discount factor and capital accumulation equation
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"
! = 0.40
"
"
OR
Data: avg. net real return on capital ! 5% per year (e.g, return on S&P500)
!! Steady-state Euler equation
f k ( k , n) =
#1 + "
"
!!
!!
Labor subutility
!! Common form
v ( n) = #
!! !! !!
"
1 + 1/ !
n1+1/!
# measures Frisch elasticity of labor supply (use C-L optimality condition) Calibrate $ to hit
n ! 0.3
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!!
Tension between macro and micro evidence not useful way to frame the controversy Micro studies pick up intensive margin of labor supply Macro studies pick up (mostly) extensive margin of labor supply
!! And other frictions in allocation of workers to jobs
!! !!
!!
Chetty (2011 Econometrica): uses both macro and micro evidence to put bounds on labor supply elasticity
!!
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ln zt +1 = (1 # ! z ) ln z + ! z ln zt + " t +1
!!
!!
AR(1) estimation
!! Quarterly frequency
# ! z = 0.95
January 31, 2013
Summary
2.!
3.! 4.!
5.!
6.!
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