1 / 86

EC213 Macroeconomics Dr Aidan Kane

EC213 Macroeconomics Dr Aidan Kane. Topic 2: Intertemporal budget constraints Chapters 3,4 Burda + Wyplosz. Outline. The consumer’s intertemporal budget constraint …private sector Public sector budget constraints Consolidated public and private sector constraints

Gabriel
Télécharger la présentation

EC213 Macroeconomics Dr Aidan Kane

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. EC213 MacroeconomicsDr Aidan Kane Topic 2: Intertemporal budget constraints Chapters 3,4 Burda + Wyplosz

  2. Outline • The consumer’s intertemporal budget constraint …private sector • Public sector budget constraints • Consolidated public and private sector constraints • The Ricardian Equivalence proposition • National Intertemporal budget constraints • Optimal Consumption/Consumption smoothing • Impact of temporary vs. permanent changes in income on savings • Impact of changes in interest rates on savings

  3. Budget constraints • Real analysis • Microeconomic foundations • Intratemporal vs. intertemporal • ‘Robinson Crusoe’ model: Two time periods Income in both periods (endowment) Y Ability to lend or borrow at rate r

  4. See Figure 3.1 p.48 Period 2 0 Period 1

  5. See Figure 3.1 p.48 Period 2 0 Y1 Period 1

  6. See Figure 3.1 p.48 Period 2 Y2 0 Y1 Period 1

  7. See Figure 3.1 p.48 Period 2 A Y2 0 Y1 Period 1

  8. See Figure 3.1 p.48 Period 2 D Y1(1+r) A Y2 0 Y1 Period 1

  9. See Figure 3.1 p.48 Period 2 D Y1(1+r) A Y2 B 0 Y1 Y2/(1+r) Period 1

  10. See Figure 3.1 p.48 Period 2 D Y1(1+r) A Y2 B 0 Y1 Y2/(1+r) Period 1

  11. See Figure 3.1 p.48 Period 2 D Y1(1+r) A Y2 B 0 Y1 Y2/(1+r) Period 1

  12. See Figure 3.1 p.48 Period 2 D Y1(1+r) A Y2 Borrowing in Period 1 C1 > Y1 B 0 Y1 Y2/(1+r) Period 1

  13. See Figure 3.1 p.48 Period 2 D Y1(1+r) A Y2 Borrowing in Period 1 C1 > Y1 C2 B C1 0 Y1 Y2/(1+r) Period 1

  14. See Figure 3.1 p.48 Period 2 D Saving in Period 1 C1 < Y1 Y1(1+r) A Y2 Borrowing in Period 1 C1 > Y1 C2 B C1 0 Y1 Y2/(1+r) Period 1

  15. See Figure 3.1 p.48 Period 2 D C2 Saving in Period 1 C1 < Y1 Y1(1+r) A Y2 Borrowing in Period 1 C1 > Y1 C2 B C1 0 Y1 Y2/(1+r) C1 Period 1

  16. See Figure 3.1 p.48 Period 2 D OD = Y2 + Y1(1+r) Y1(1+r) A Y2 B 0 Y1 Y2/(1+r) Period 1

  17. See Figure 3.1 p.48 Period 2 D OD = Y2 + Y1(1+r) OB = Y1 + Y2/(1+r) Y1(1+r) A Y2 B 0 Y1 Y2/(1+r) Period 1

  18. See Figure 3.1 p.48 Period 2 D OD = Y2 + Y1(1+r) OB = Y1 + Y2/(1+r) -OD/OB = -(1+r) Y1(1+r) A Y2 B 0 Y1 Y2/(1+r) Period 1

  19. Intertemporal budget constraint • First period: Y1 income, C1 • Savings/borrowings: Y1- C1 • Second period: C2 = Y2 + (Y1- C1)(1+r) C1(1+r) + C2 = Y1(1+r) + Y2 C1 + C2 /(1+r) = Y1 + Y2/(1+r)

  20. Lifetime income(wealth) constrains consumption • C1 + C2 /(1+r) = Y1 + Y2/(1+r) • present value of consumption = present value of income • = wealth  • = OB

  21. Discounting and present values • An example • bond pays £100 in 1 year’s time • interest rate is 5% • price of bond now i.e. present value • B(1 + 0.05)=100 • B = 100/(1.05) = £95.24 • For 2 year bond, B = 100/(1.05)2 = £90.7

  22. More generally... • A stream of payments a1, a2, ...., an • Present value = • a1/(1+r) + a2/(1+r)2 + ....+ an/(1+r)n • when payment = a for ever, • present value = a/r

  23. The public sector buget constraint • Assume two period, no initial debt • Spending G1 and G2 • Taxation T1 and T2 • All debts must be paid off (government does not default) • T2 = G2 +(G1 - T1)(1 + rG) • G1 + G2/(1 + rG) = T1 + T2 /(1 + rG)

  24. Deficits and primary deficits • Given initial debt D0, and interest payments rG D0 • Total deficit = (G1 - T1 ) + rG D0 • i.e. primary deficit + interest payments • Then.. • D0 + (G1 - T1 ) + (G2 - T2) /(1+rG)=0

  25. Consolidated private and public budget constraints C1 + C2 /(1+r) = (Y1-T1) + (Y2 -T2) /(1+r) G1 + G2/(1 + rG) = T1 + T2 /(1 + rG) (C1 + G1) + (C2 + G2)/(1+r)=Y1 + Y2/(1+r) • present value of domestic spending = present value of domestic income • leads to Ricardian equivalence proposition

  26. Ricardian Equivalence Given: (C1 + G1) + (C2 + G2)/(1+r)=Y1 + Y2/(1+r) (1) private sector internalises public sector budget constraint: deficits have no real effects (2) public debt is not net wealth for the private sector Contrast with Keynesian ‘multiplier’ effect Ireland 1987-88: an ‘Expansionary Fiscal Contraction’?

  27. Example: a tax cut • C1 + C2 /(1+r) = (Y1-T1) + (Y2 -T2) /(1+r) • = C1 + C2 /(1+r) = Y1+ Y2 /(1+r) - [T1+ T2 /(1+r)] DT1 = DT DT2 = (1+r)DT change in PV of taxes = DT + (1+r)DT/(1+r) = 0

  28. Period 2 Ricardian Equivalence See Figure 3.11 p.59 0 Period 1

  29. Period 2 Ricardian Equivalence See Figure 3.11 p.59 A Y2 0 Y1 Period 1

  30. Period 2 Ricardian Equivalence See Figure 3.11 p.59 A Y2 0 Y1 Period 1

  31. Period 2 Ricardian Equivalence See Figure 3.11 p.59 A Y2 A´ Y2- G2 0 Y1- G1 Y1 Period 1

  32. Period 2 Ricardian Equivalence See Figure 3.11 p.59 A Y2 A´ Y2- G2 0 Y1- G1 Y1 Period 1

  33. Problems with Ricardian Equivalence • Different time horizons • Different interest rates • Liquidity contraints

  34. Public and private interest rates Table 3.1 p.60 % p.a. 1995 Treasury Bonds Corporate Bonds Belgium 6.83% 7.33%

  35. Public and private interest rates Table 3.1 p.60 % p.a. 1995 Treasury Bonds Corporate Bonds Belgium 6.83% 7.33% France 7.17% 7.60%

  36. Public and private interest rates Table 3.1 p.60 % p.a. 1995 Treasury Bonds Corporate Bonds Belgium 6.83% 7.33% France 7.17% 7.60% Italy 11.51% 10.09%

  37. Different interest rates If r > rG consolidated budget constraint:

  38. Different interest rates If r > rG consolidated budget constraint: C1 + C2 (1+r) =

  39. Different interest rates If r > rG consolidated budget constraint: C1 + C2 (1+r) = (Y1 - G1) + (Y2 - G2) + (1+r)

  40. Different interest rates If r > rG consolidated budget constraint: C1 + C2 (1+r) = (Y1 - G1) + (Y2 - G2) + (1+r) (r - rG ) [G1 - T1] (1+r)

  41. Liquidity constraints Liquidity constraints: • inability to borrow against future income at any interest rate • credit rationing • a form of market failure e.g. in human capital market

  42. Period 2 Liquidity constraints See Figure 3.13 p.61 A Y2- G2 0 Y1- G1 Period 1

  43. Period 2 Liquidity constraints See Figure 3.13 p.61 A Y2- G2 0 Y1- G1 Period 1

  44. Period 2 Liquidity constraints See Figure 3.13 p.61 A Y2- G2 0 Y1- G1 Period 1

  45. National intertemporal budget constraint • Open economy not limited by domestic income • (S-I) + (T-G) = CA • Given F, net asset position with rest of world • and r, return on net assets • CA = Primary Current Account + net investment income • CA = PCA + rF • Ignoring any initial assets in a two-period model: • PCA1 + PCA2/(1+r) = 0

  46. Optimal consumption • Preferences: indifference curves • Consumption smoothing

  47. Period 2 See Figure 4.2 p.77 0 Period 1

  48. Period 2 See Figure 4.2 p.77 0 Period 1

  49. Period 2 See Figure 4.2 p.77 0 Period 1

  50. Period 2 See Figure 4.2 p.77 R 0 Period 1

More Related