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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:
assuming E & Y* fixed, for now. Y TB + - …and rises in contractions where slope = -m ≡ - marginal propensity to import TB falls in expansions… as does consumption: Keynesian consumption function ITF220 - Prof. J. Frankel, Harvard University
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Trade balance rises in recessions,
The US trade balance improved sharply in the recession of falls in expansions $ MILLIONS PER QUARTER Current Account Goods & Services ITF220 - Prof. J. Frankel, Harvard University
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Determination of equilibrium income in open-economy Keynesian model
Now solve: where and ITF220 - Prof. J. Frankel, Harvard University
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ITF220 - Prof. J. Frankel, Harvard University
Derivation of National Saving Identity Income ≡ Output (assuming no transfers) Y ≡ GDP / / C + S + T ≡ C + I + G + X -M S + (T-G) ≡ I + X – M National Saving Identity NS ≡ S + BS ≡ I + TB ITF220 - Prof. J. Frankel, Harvard University
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ITF220 - Prof. J. Frankel, Harvard University
US National Saving, Investment, & Current Account as Shares of GDP, Trend: Gap widened, as NS fell relative to I ITF220 - Prof. J. Frankel, Harvard University
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ITF220 - Prof. J. Frankel, Harvard University
Keynesian Consumption Function: or, expressed as a saving function: where s ≡ 1 – c . } ITF220 - Prof. J. Frankel, Harvard University
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ITF220 - Prof. J. Frankel, Harvard University
Closed economy: NS – I = 0 Fiscal Expansion 1 < Closed-economy multiplier 1/s < ∞ ITF220 - Prof. J. Frankel, Harvard University
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ITF220 - Prof. J. Frankel, Harvard University
Open economy: NS – I = TB = X – M Imports: for simplicity Exports: for simplicity. ITF220 - Prof. J. Frankel, Harvard University
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ITF220 - Prof. J. Frankel, Harvard University
Open economy Fiscal Expansion slope = s ITF220 - Prof. J. Frankel, Harvard University
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ITF220 - Prof. J. Frankel, Harvard University
End of Lecture 4: Introduction to the Keynesian Model ITF220 - Prof. J. Frankel, Harvard University
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ITF220 - Prof. J. Frankel, Harvard University
Appendix Puzzle: Why did global trade collapse in the global recession? (more than usual) 2009 Bussière, Callegari, Ghironi, Sestieri & Yamano, 2013, "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of " ITF220 - Prof. J. Frankel, Harvard University
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ITF220 - Prof. J. Frankel, Harvard University
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 Bussière, Callegari, Ghironi, Sestieri & Yamano, 2013, "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of " ITF220 - Prof. J. Frankel, Harvard University
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