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

Imports & exports depend on income: Y TB as does consumption: Keynesian consumption function assuming E & Y* fixed, for now. where slope = -m ≡ - marginal propensity to import TB falls in expansions… …and rises in contractions API Professor Jeffrey Frankel, Harvard University

Trade balance rises in recessions, API Professor Jeffrey Frankel, Harvard University falls in expansions

Determination of equilibrium income in open-economy Keynesian model whereand Now solve: API 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 National Saving Identity C + S + T ≡ C + I + G + X -M

API Professor Jeffrey Frankel, Harvard University US National Saving, Investment, & Current Account as Shares of GDP, Trend: Gap widened, as NS fell relative to I

API Professor Jeffrey Frankel, Harvard University Keynesian Consumption Function: } or, expressed as a saving function: where s ≡ 1 – c.

API Professor Jeffrey Frankel, Harvard University Closed economy: NS – I = 0 Fiscal Expansion 1 < Closed-economy multiplier 1/s < ∞

Imports: for simplicity API Professor Jeffrey Frankel, Harvard University Open economy: NS – I = TB = X – M Exports: for simplicity

API Professor Jeffrey Frankel, Harvard University Fiscal Expansion slope = s Open economy

API Professor Jeffrey Frankel, Harvard University End of Lecture 4: Introduction to the Keynesian Model

Bussière, Callegari, Ghironi, Sestieri & Yamano, 2013, "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of " Appendix -- Puzzle: Why did global trade c ollapse in the global recession? (more than usual) 2009

API Professor Jeffrey Frankel, Harvard University Bussière, Callegari, Ghironi, Sestieri & Yamano, 2013, "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of " 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