Financial Intermediation and Fiscal Policy - Lecture Notes for Econ 208, Study notes of Music

Download Financial Intermediation and Fiscal Policy - Lecture Notes for Econ 208 and more Study notes Music in PDF only on Docsity! a Econ 208 Marek Kapicka Lecture 18 Financial Intermediation Review  4 Today a Finish credit rationing =» Review = Info about final Financial Intermediaries  In equilibrium, three classes of agents  a<a*(r): forced savers, credit rationed  a*(r)<a<1: borrowers  a>1 savers, self finance a project 4 Review a Review Economic Principles  Models we’ve seen  Trade-offs  Preferences  What happens if there is an exogenous change  Competitive equilibrium: prediction of the model Fiscal Policy What happens if government increases expenditures?  Main Results:  Increase in output, labor supply  Decrease in consumption (crowding out)  Fiscal multiplier λ: $1 change in govt expenditures ̶> $λ change in GDP  Theory: <=1; depends on efficiency of public spending, elasticity of labor supply  Empirical Evidence: ~0.8-1.4 Fiscal Policy What happens if government increases taxes?  Main Results  Ricardian Equivalence: no change in consumption  Path of govt debt is irrelevant  Reason: no wealth effects  Failure of Ricardian Equivalence  Heterogeneity (in wealth or age)  Distortive taxes  Imperfect credit markets Fiscal Policy Failure of RI: Heterogeneity across generations  Social Security: Intergenerational redistribution  Real effects of different social security schemes  PAYG vs. FF  PAYG better if population growth rate > interest rate Monetary Policy Long Run Effects  Increases in money supply  increases in prices  No effect on output or consumption Monetary Policy Short Run Effects  Unexpected money supply changes decrease unemployment (Phillips Curve)  “confusion” of real and nominal changes  Cannot be used for systematic monetary policy  Can explain inflation in 1960’s-1970’s Monetary Policy Institutions producing Sound Monetary Policy  Central banks are tempted to increase inflation in the short run  Commitment to low inflation is key to a good monetary policy  Examples of commitment:  Independent central bankers  Inflation Targeting