Lecture 6 Slides

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Lecture 6 Slides

  1. 1. EC6012 Lecture 6 Stephen Kinsella Notation Balance Sheet EC6012 Lecture 6 Transactions Matrix Government Money with Portfolio Choice Equation System Endogenous Money Problem 1 Stephen Kinsella Steady State Solutions Pictures Next Time Dept. Economics, University of Limerick. stephen.kinsella@ul.ie January 20, 2008
  2. 2. EC6012 Lecture 6 Notation Stephen Kinsella Notation Balance Sheet Balance Sheet Transactions Matrix Equation System Transactions Matrix Endogenous Money Problem 1 Steady State Equation System Solutions Pictures Endogenous Money Next Time Problem 1 Steady State Solutions Pictures Next Time
  3. 3. 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 ) V Wealth of Households, in nominal terms Bh,cb Bills held by households, central banks.
  4. 4. Balance Sheet for PC. Households Production Government Central Bank Money +H −H 0 Bills +Bh −B +Bcb 0 Balance (net worth) -V +V 0 0 0 0 0
  5. 5. Transactions matrix for PC. Central Bank Households Production Government Current Capital Consumption -C +C 0 Govt. Expenditures +G -G 0 Income = GDP +Y -Y 0 Interest Payments -r−1 · Bh−1 +r−1 · B−1 +r−1 · Bcb−1 0 Central Bank Profits +r−1 · Bcb−1 −r−1 · Bcb−1 0 Taxes -T +T 0 Change in Money −∆H +∆H 0 Change in Bills −∆BH +∆B −∆Bcb 0 0 0 0 0 0 0 Table: Transactions matrix for PC.
  6. 6. Equation System EC6012 Lecture 6 Stephen Kinsella Notation Balance Sheet Y = G +C (1) Transactions Matrix YD = Y − T + r−1 · Bh−1 (2) Equation System T = θ · (Y + r−1 · Bh−1 ) (3) Endogenous Money Problem 1 V = V−1 + (YD − C ) (4) Steady State Solutions C = α1 · YD + α2 · V−1 , 0 < α1 < α2 < 1 (5) Pictures Next Time Hh YD = (1 − λ0 ) − λ1 · r + λ2 · (6) V V Bh YD = λ 0 + λ 1 · r − λ2 · (7) V V Hh = V − Bh (8)
  7. 7. Endogenous Money EC6012 Lecture 6 Stephen Kinsella Notation Balance Sheet ∆Bs = Bs − Bs−1 = (G + r−1 · Bs−1 ) − (T + r−1 · Bcb−1 ) (9) Transactions Matrix ∆Hs = Hs − Hs−1 = ∆Bcb (10) Equation System Bcb = Bs − Bh (11) Endogenous Money Problem 1 r = r (12) Steady State Solutions Pictures Next Time
  8. 8. Problem 1 EC6012 Lecture 6 Stephen Kinsella Notation Balance Sheet Transactions Matrix Equation System Endogenous Money Problem 1 Steady State Solutions Pictures Next Time
  9. 9. EC6012 Lecture 6 Stephen Kinsella α3 = α2 · (1 − α1 )/α2 (13) Notation ∆V = α2 · (α3 − V−1 ) (14) Balance Sheet V∗ Transactions = α3 (15) Matrix YD ∗ Equation System ∗ Bh · r Endogenous Money ∗ r = (16) V∗ Problem 1 Steady State Solutions Pictures Next Time
  10. 10. Money Demand With Random Shocks EC6012 Lecture 6 Stephen Kinsella 110 Notation Balance Sheet Held money balances 35.0 Transactions (continuous line) Matrix Equation System 30.0 Endogenous Money Problem 1 25.0 Steady State Solutions Pictures 20.0 Next Time Money demand (dotted line) 15.0 10.0 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 Figure 4.1 Money demand and held money balances, when the economy is subjected to random shock Figure: Money Demand 22.5
  11. 11. EC6012 Lecture 6 Evolution of Money/Shares Balances Stephen Kinsella 112 Monetary Economics Notation Share of Share of money balances bills Balance Sheet Transactions 0.250 0.800 Matrix Share of bills in household portfolios Equation System 0.240 0.790 Endogenous Money Problem 1 0.230 0.780 Steady State Solutions Pictures 0.220 0.770 Next Time 0.210 0.760 Share of money balances in household portfolios 0.200 0.750 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Figure 4.3 Evolution of the shares of bills and money balances in the portfolio of Figure:households, following anthe sharespointsbills rate of interest on bills Evoluation fo increase of 100 of in the and money balances in household portfolios. Figure 4.3 shows how the allocation of wealth between cash and bills changes when the interest rate goes up. As such, there is nothing surprising here. The model is built in such a way that higher interest rates induce house- holds to hold more interest paying bills, following the well-known principle that households tend to hold more of an asset when its rate of return is higher
  12. 12. Next Time EC6012 Lecture 6 Stephen Kinsella Summarise Chapter 4 Notation Homework Balance Sheet Presentations Transactions Matrix Equation System Endogenous Money Problem 1 Steady State Solutions Pictures Next Time
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