EC6012 2008 Lecture 2

EC6012 Lecture 2 Stephen Kinsella Problem Tobin and the Old EC6012 Lecture 2 Yale School The Multiplier Review of Intermediate Concepts Godley & Lavoie Approach Homework & Blogs Stephen Kinsella References Dept. Economics, University of Limerick. stephen.kinsella@ul.ie January 16, 2008

Outline EC6012 Lecture 2 Stephen Kinsella Problem Problem Tobin and the Old Yale School The Multiplier Godley & Lavoie Tobin and the Old Yale School Approach Homework & Blogs References The Multiplier Godley & Lavoie Approach Homework & Blogs

Problem EC6012 Lecture 2 Stephen Kinsella Where is the connection? Problem Orthodox Theory vs. Structuralist Theory Tobin and the Old Yale School The Multiplier Godley & Lavoie Approach Homework & Blogs References

Tobin’s Nobel Lecture EC6012 Lecture 2 (Sections 2.9 & 4) Stephen Kinsella Problem Statistics of Stocks and Flows Tobin and the Old Yale School ”The innovation of the approach thus far described The Multiplier is the integration of saving and portfolio decisions. Godley & Lavoie Functions for accumulation of particular assets are Approach Homework & Blogs speciﬁed, and they add up to total wealth References accumulation for the period.” Dynamics and Steady States . . . dynamic solutions of a non-linear system, even one of such small dimensionality. . . cannot be obtained analytically but require simulations.

Idea EC6012 Lecture 2 Stephen Kinsella In a sentence Problem If investment increases, there will be an increase in output as Tobin and the Old Yale School a result of a ‘multiplier’ relationship between equilibrium The Multiplier output and the autonomous components of spending Godley & Lavoie Approach History Homework & Blogs Harrod→Keynes→Hicks→Kahn→Dusenberry→Metzler References Derivation: Orthodox Handout & Blackboard

Notation Symbol Meaning G Pure government expenditures in nominal terms Y National Income in Nominal Terms C Consumption of goods supply by households, in nominal terms T Taxes θ Personal Income Tax Rate YD Disposable Income of Households α1 Propensity to consume out of regular (present) income α2 Propensity to consume out of past wealth ∆Hs Change in cash money supplied by the central bank ∆Hh Cash money held by households H, H−1 High Powered cash money today, and yesterday (−1 )

The Model EC6012 Lecture 2 Stephen Kinsella Problem Tobin and the Old G (1) Yale School Y = G +C (2) The Multiplier Godley & Lavoie T = θ×Y (3) Approach YD = Y − T (4) Homework & Blogs References C = α1 × YD + α2 × H1 (5) ∆Hs = G −T (6) δHh = YD − C (7) H = ∆H + H−1 (8)

Derivation EC6012 Lecture 2 Stephen Kinsella If we start by solving the model for Y , everything will Problem become clear. Thus Y = G + C and T = θY , and by Tobin and the Old substituting in for T and factoring, we get Yale School The Multiplier Godley & Lavoie Approach YD = Y − T (9) Homework & Blogs = Y × (1 − θ). (10) References By similar logic, C = α1 × YD + α2 × H−1 .

Derivation, continued EC6012 Lecture 2 Stephen Kinsella Since, in period 2, H−1 = 0, we can say that Problem C = α1 × Y (1 − θ). Substitute this into Y = G + C Tobin and the Old and we get Yale School The Multiplier Godley & Lavoie Approach Y = G + α1 Y (1 − θ), (11) Homework & Blogs Y − α1 (Y )(1 − θ)) = G , (12) References Y [1 − α1 × (1 − θ)] = G , (13) G Y = (14) 1 − α1 + α1 θ

Derivation, continued EC6012 Lecture 2 Stephen Kinsella We have numbers for α1 , G [Period1], and θ—0.6, 20, Problem and 0.2. Plugging these into equation (14), we can Tobin and the Old calculate Y for period 2. We obtain Yale School The Multiplier 20 Godley & Lavoie Y = = 38.462 38.5. Approach 1 − 0.6 + 0.6 × 0.2 Homework & Blogs References

EC6012 Lecture 2 As soon as you have solved for Y , you can ﬁll in all the Stephen Kinsella remaining numbers in column 2 including ∆H and therefore H. You now have all the material you need to Problem solve for Y in period 3 (H−1 = 12.3) and the whole Tobin and the Old Yale School column in period 3. And so on. The Multiplier The system reaches a steady state when ∆H = 0 and Godley & Lavoie Approach hence YD = C . Homework & Blogs References

Problems EC6012 Lecture 2 Stephen Kinsella Fill in all the values for column 2 of table 3.4 and show Problem your workings. Ask me if you get stuck. Tobin and the Old Yale School What happens to this model if θ changes from 20% to The Multiplier 30%? Work out the ﬁrst period and then give and Godley & Lavoie economic explanation for the ﬁgures you see. Approach Homework & Blogs References

EC6012 Lecture 2 Steady States Stephen Kinsella G = T∗ = θ × W × N∗ Problem Tobin and the Old θ × W × N∗ = θ × Y Yale School The Multiplier G Godley & Lavoie Y∗ = . (15) Approach θ Homework & Blogs References

Stock-Flow Consistency EC6012 Lecture 2 Stephen Kinsella Problem Tobin and the Old C = YD − ∆Hh (16) Yale School The Multiplier = α1 × YD + α2 × Hh−1 (17) Godley & Lavoie δHh = (1 − α1 ) × YD − α2 × Hh−1 (18) Approach 1 − α1 Homework & Blogs ∆Hh = α2 × ( × YD − Hh−1 ) (19) References α2

Expectations EC6012 Lecture 2 Stephen Kinsella Problem Cd = α1 × YD e + α2 × Hh−1 . (20) Tobin and the Old Yale School The Multiplier ∆Hd = Hd − Hh−1 = YD e − Cd . (21) Godley & Lavoie Approach Homework & Blogs e Hh − Hd = YD − YD . (22) References

Dynamics EC6012 Lecture 2 Stephen Kinsella Problem G + α2 × H1 Y = . (23) Tobin and the Old 1 − α1 × (1 − θ) Yale School The Multiplier Household’s demand for money is Godley & Lavoie Approach Homework & Blogs Hh = (1 − α1 ) × (1 − θ) × Y + (1 − α2 ) × H−1 . (24) References

EC6012 Lecture 2 Stephen Kinsella Problem Tobin and the Old Yale School The Multiplier Godley & Lavoie Approach Homework & Blogs References Figure: Table 3.4 of Godley/Lavoie.

For Next Week EC6012 Lecture 2 Stephen Kinsella What do you think will happen to the steady state Problem value(s) of output when θ changes? Why does this Tobin and the Old happen? Post the answers on your blogs by next Yale School Monday. The Multiplier Godley & Lavoie Read Godley and Lavoie (2006), Chapter 2. Approach Homework, see stephenkinsella.net Homework & Blogs References

Thanks EC6012 Lecture 2 Stephen Kinsella Problem Tobin and the Old Yale School The Multiplier Godley & Lavoie Approach Homework & Blogs References

References EC6012 Lecture 2 Stephen Kinsella Wynne Godley and Marc Lavoie. Monetary Economics An Problem Integrated Approach to Credit, Money, Income, Tobin and the Old Yale School Production and Wealth. Palgrave-Macmillan, 2006. URL The Multiplier http://www.palgrave.com/products/Catalogue. Godley & Lavoie aspx?is=0230500552. Approach Homework & Blogs References

EC6012 2008 Lecture 2

0 comments

Notes on slide 1

Favorites, Groups & Events