, -acroeconomics
I
Week 3-
-
~
-
Consumption saving model
·
Our division advises the governor using economic analyses
↳ DNB
organisation chart i work at this division and this department
.
1) Dynamic Stochastic
general equilibrium (DSGE) models
(goods ,
labour,
) & Ma
S
model consists of different
types ofagents' (household , firms ,
-
...
>
-
agents live for multiple periods (dynamic model 17 .
>
- households decide how much to consume
,
save , work, ...
2) Consumption -
Saving model
* simplified version of household sector of a
typical DSGe Model
-households live 2
periods
only
helps to
simplify analysis but retains
insight from models with more than 2
periods .
-
,
cycles ,
=> both models are used to better understand business
* consumption dynamics are smoother than those of income ! -
ex . the variability
n
on
Consumption is around 25 % less
-
than that of GDP .
-
S
identical households - 1 representative household
Many
all variables are 'real' (denominated iunits of good
no
Money , -
n
household earns income in resent
the & re (doesn't work I
↳ future income is known with
certainty
*
, so no need for expectations ! Assumptions of
h holds can e or borrow at some (real) interest rate CSM
-
h holds faces constraint in
.
a
budget every period
objective hihold- &
y
main of much to consume save such
that the lifetime is maximized
utility
-
, key properties of the model-
-
1) U .
h consumption depends &
on both current forward income
- households are forward
looking ! A **
2) An anticipated increase in income (present/future) makes the h h . . want to
increase consumption in both periods -> Consumption smoothing ! (through saving/borrowing
consumption smoothing h.h prefers to maintain stable level of consumption
:
. a
-
rather than experience large fluctuations . 2X : family creates a
monthly budget that
you
aside Then
Set
money for emergencies , unplanned expenses , future
goals
.
you use your savings
When its time to of these.
pay one
sok anlamli
-
3) Effects of a
change in interest rate on consumption is
ambiguous
* substitution effect : higher interest reduces consumption&
* income effect :
higher interest rate could reduce/raise consumption &
-
Model setup
household
* 1
representative
* household lives for 2 periods - - (present) and + 1 (future)
* household receives on
exogenous stream of income in both
periods >
-
Ye and Yet
# household enters
period+ without wealth (for simplicity
*
* in period - , household can consume ,
Co , or same St : St =
Ye C +
*
negative savings are allowed & imply the household is
borrowing !
* interest rate
=
rt
* (1 + re)St => additional income in period ++ 1 if household saves s or what the n n
. .
needs to
pay back at ++ 1 if it borrows St)
, Flow
budget constraints
-
In period t : (c +
St Ye
- ~ W
uses of funds sources of funds
In
period + +: (t 1 + Set
+
Yem + (1 + rt)Se -
- -
uses of funds sources of funds
* St =
stock of funds ->
which the household takes from + to ++1
St-Se-"flow savings
of
saving in the stock of
-
*
change
* A
-
household enters- without wealth = St-1
=
0
(empty savings account)
>
-
simplify flow
budget constraint
ways
in : ↑
1) weak
inequality constraints will hold with equality-> because hi doesn't want
to waste resources
change "to" "
: =
·
↳ear!
2) impose terminal condition -
Set =
0
① ?
* If Sett O ,
then household would leave behind
savings that
Could be used to raise consumption x
⑳ 6
* if Stt1 O , then household would leave behind debt.
If this were possible ,
it would be optimal for he to
choose St + 1
= -
- which we assure isn't equilib .
I
Week 3-
-
~
-
Consumption saving model
·
Our division advises the governor using economic analyses
↳ DNB
organisation chart i work at this division and this department
.
1) Dynamic Stochastic
general equilibrium (DSGE) models
(goods ,
labour,
) & Ma
S
model consists of different
types ofagents' (household , firms ,
-
...
>
-
agents live for multiple periods (dynamic model 17 .
>
- households decide how much to consume
,
save , work, ...
2) Consumption -
Saving model
* simplified version of household sector of a
typical DSGe Model
-households live 2
periods
only
helps to
simplify analysis but retains
insight from models with more than 2
periods .
-
,
cycles ,
=> both models are used to better understand business
* consumption dynamics are smoother than those of income ! -
ex . the variability
n
on
Consumption is around 25 % less
-
than that of GDP .
-
S
identical households - 1 representative household
Many
all variables are 'real' (denominated iunits of good
no
Money , -
n
household earns income in resent
the & re (doesn't work I
↳ future income is known with
certainty
*
, so no need for expectations ! Assumptions of
h holds can e or borrow at some (real) interest rate CSM
-
h holds faces constraint in
.
a
budget every period
objective hihold- &
y
main of much to consume save such
that the lifetime is maximized
utility
-
, key properties of the model-
-
1) U .
h consumption depends &
on both current forward income
- households are forward
looking ! A **
2) An anticipated increase in income (present/future) makes the h h . . want to
increase consumption in both periods -> Consumption smoothing ! (through saving/borrowing
consumption smoothing h.h prefers to maintain stable level of consumption
:
. a
-
rather than experience large fluctuations . 2X : family creates a
monthly budget that
you
aside Then
Set
money for emergencies , unplanned expenses , future
goals
.
you use your savings
When its time to of these.
pay one
sok anlamli
-
3) Effects of a
change in interest rate on consumption is
ambiguous
* substitution effect : higher interest reduces consumption&
* income effect :
higher interest rate could reduce/raise consumption &
-
Model setup
household
* 1
representative
* household lives for 2 periods - - (present) and + 1 (future)
* household receives on
exogenous stream of income in both
periods >
-
Ye and Yet
# household enters
period+ without wealth (for simplicity
*
* in period - , household can consume ,
Co , or same St : St =
Ye C +
*
negative savings are allowed & imply the household is
borrowing !
* interest rate
=
rt
* (1 + re)St => additional income in period ++ 1 if household saves s or what the n n
. .
needs to
pay back at ++ 1 if it borrows St)
, Flow
budget constraints
-
In period t : (c +
St Ye
- ~ W
uses of funds sources of funds
In
period + +: (t 1 + Set
+
Yem + (1 + rt)Se -
- -
uses of funds sources of funds
* St =
stock of funds ->
which the household takes from + to ++1
St-Se-"flow savings
of
saving in the stock of
-
*
change
* A
-
household enters- without wealth = St-1
=
0
(empty savings account)
>
-
simplify flow
budget constraint
ways
in : ↑
1) weak
inequality constraints will hold with equality-> because hi doesn't want
to waste resources
change "to" "
: =
·
↳ear!
2) impose terminal condition -
Set =
0
① ?
* If Sett O ,
then household would leave behind
savings that
Could be used to raise consumption x
⑳ 6
* if Stt1 O , then household would leave behind debt.
If this were possible ,
it would be optimal for he to
choose St + 1
= -
- which we assure isn't equilib .
