Tu, 09/02/14
Welcome to Econ-4721!
Today, we introduced each other and then talked about the syllabus. For those who missed this first class you can find the syllabus in this class website.
We did a sort of brainstorming on the definition of money. All were very accurate. We then moved into the discussion of the Overlapping Generations Model (OLG) which will be the workhorse model for the rest of the semester. This model will be used to study the role of money in an economy.
Please read Chapter 1 from the textbook.
Th, 09/04/14
We discussed the story of the OLG model without money. The main conclusion from this story is that trade is not possible. We then moved to the story of the OLG model with money. We introduced money into the story by assuming that the initial old generation receives a fixed amount of money M1. Under this case in each period the old generation has what the young generation needs (fiat money) while the young generation has what the old generation needs (consumption goods). Hence trade will be possible. Money then will be value since it can play the role as a medium of exchange.
Next class we will finish this story. Please keep reading Chapter 1 from the textbook.
Tu, 09/09/14
We finished the discussion of the 'OLG model with money' story. The end of the story for the initial old generation (IOG) was easy. For each future generation (FG) though we had to set up the Lagrangian function, find the FOCs, and find algebraic expressions for consumption when young, when old, and for real money holdings. We then worked out an example using logarithmic preferences. In this case we saw that consumption when young does not depend on the real rate of return of money. I talked about a first effect: the pricing or substitution effect. This effect says that if the real rate of return increases consumption when young becomes expensive relative to consumption when old. However, given that in the formula c_1,t does not depend on the real rate of return it must be the case the there is a second effects that cancels out the first one (substitution effect). I asked you to think about this second effect.
Next class we will talk about competitive equilibrium. Please keep reading Chapter 1 from the textbook.
Th, 09/11/14
PS1 is posted
Today we defined a competitive equilibrium for an OLG economy with constant money and growing population. We did this informally and then formally. In general the notion of a competitive equilibrium involves two characteristics: (1) everyone acts in their self-interest, and (2) market clears. At the end of the class we derived an expression for relative prices in equilibrium. We saw that 'v_t+1/v_t' is equal to 'n' the population growth rate. (I left as an exercise to think about the intuition of this result). We derived this expression by using the clearing condition in the money market and the assumption of stationarity for the consumption allocations.
Next class we will cover an example on how to find the competitive equilibrium in this OLG economy.
Tu, 09/16/14
Quiz #1
We completely defined the competitive equilibrium in an OLG model with money. We were able to find expressions prices and quantities in this economy. We then discussed an example using logarithmic preferences. We used this example to learn how to het absolute prices of money v(t).
We then asked the question on the efficiency of the competitive consumption allocations. We claimed that those allocations are actually efficient in the sense of Pareto. We are in the process of proving this statement. First, we have to claim that the Pareto Efficient consumption allocations are found by means of solving the problem of the Social Planner. This entity cares about the welfare of all agents in this economy. Therefore, it aims at maximizing the social welfare by respecting a feasibility constraint. We did this in class. The second point, which we will discuss next class, is about proving that the solution of the Social Planner's problem coincides with the consumption allocations of the monetary equilibrium.
Please keep reading Chapter 1 from the textbook.
Th, 09/18/14
Tu, 09/23/14
PS1 is due
Stats are (/100):
Mean: 86
Median: 89
Max: 100
Min: 49
Th, 09/25/14
Tu, 09/30/14
Quiz #2
We went over the inefficiency of the CE with variable money supply. Next class we will continue this discussion. Please keep reading Chapter 3 from the textbook
Th, 10/02/14
We made a review on the comparison between the competitive equilibrium (CE) allocation and the Pareto efficient (PE) allocation. We did this for the OLG economies with constant money supply and growing money supply. We concluded that the CE in the first case is efficient while in the second case it is not.
Please keep reading Chapter 3 from the textbook
Tu, 10/07/14
This was a practice session. We compared the CE and PE allocations under four different government constraints. For more details about these constraints please see the file 'Q3_info' in the quizzes section in this class website. We concluded that the CE is not Pareto efficient whenever the government uses monetary expansion to finance its own expenditures or transfers to other people.
Th, 10/09/14
PS2 is posted
Tu, 10/14/14
Quiz #3
From our discussion of Chapter 3 from the textbook we concluded that
1) Instead on relying on monetary expansion (and thereby inflation) the government can finance its purchases via lump-sum taxes without affecting the Pareto efficiency of the competitive consumption allocations.
2) More importantly, inflation is bad because it distortions relative prices.
Please start reading Chapter 4 from the textbook.
Th, 10/16/14
We talked about exchange rates in a model of two countries and two generations. Each country has its own money. We allow for restriction in the holding of money. Only old people can use both monies. Thus the money markets in both countries operate independently. With this assumption we showed that the growth rate of the exchange rate depends on the population growth rates and on the rates of expansion of money supply in both countries. We commented on the effect of one of this determinants of the pattern of the exchange rate. It is your job to provide the intuition of the remaining determinants.
Please read Chapter 4 from the textbook.
Tu, 10/21/14
We discussed the answer key of the second problem set
PS2 is due
Stats are (/100):
Mean: 82
Median: 85
Max: 98
Min: 25
Th, 10/23/14
We completed the discussion of flexible exchange rates. Please study the case of fixed exchange rates.
Tu, 10/28/14
Midterm
Time: 1:00 am-2:15 pm
Location: Hanson Hall 1-111
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Th, 10/30/14
We talked about the midterm. You gave me a lot of feedback on the level of difficulty of the midterm.
Tu, 11/04/14
We talked about flexible exchange rates. Please read Chapter 4 up to page 80
Th, 11/06/14
PS3 is posted
We started the discussion of Chapter 6. Our objective is to allow people in the OLG economy to hold two assets: money and capital. We'll first focus in the case in which people can only save in form of capital. We introduced the concept of technology.
Please read Chapter 6
Tu, 11/11/14
Quiz #4
We solved the quiz. We talked about two different technologies: linear and concave. The latter technology exhibits decreasing marginal returns. We then extended the model to have two assets. When the technology is linear the composition of the portfolio is undetermined when the returns of money and capital are the same. In case they differ, people will prefer the asset which secures the higher return. When the technology is concave the portfolio can be determined. It will typical be composed of a positive amount of capital holdings
Th, 11/13/14
We covered some numerical examples based on the discussion of the previous lecture
Tu, 11/18/14
PS3 is due
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I briefly commented on the third problem from the PS3. We then talked about the choice of the golden rule for capital. We said that this capital level is the capital allocation that maximizes the welfare of all future generations.
Please start reading Chapter 7
Th, 11/20/14
We talked about the case in which people in the OLG economy value both money and capital. Money is valued because is a liquid asset. Capital is valued because it gives a higher return than money.
Please read Chapter 7 from the textbook
Tu, 11/25/14
Quiz #5
Th, 11/27/14
Tu, 12/02/14
Th, 12/04/14
Tu, 12/09/14
Quiz #6
Th, 12/11/14
Tu, 12/15/14
Final
Time: 8:00 am-10:00 pm
Location: Hanson Hall 1-111
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