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Macro Lecture Notes|Views: 11|Likes: 2

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- Money and Prices
- 1.1 Deﬁnitions
- 1.1.1 Prices
- 1.1.2 Money
- 1.2 The History of Money
- 1.3 The Demand for Money
- 1.3.1 The Baumol-Tobin Model of Money Demand
- 1.4 Money in Dynamic General Equilibrium
- 1.4.1 Discrete Time
- 1.4.2 Continuous Time
- 1.4.3 Solving the Model
- 1.5 The optimum quantity of money
- 1.5.1 The Quantity Theory of Money
- 1.6 Seigniorage, Hyperinﬂation and the Cost of Inﬂation
- 1.7 Problems
- Nominal Rigidities and Economic Fluctuations
- 2.1 Old Keynesian Economics: The Neoclassical Synthesis
- 2.1.1 Open Economy
- 2.1.2 Aggregate Supply
- 2.2 Disequilibrium Economics
- 2.2.1 Setup
- 2.2.2 The Walrasian Benchmark Case
- 2.2.3 Exogenously Fixed Price
- 2.2.4 Exogenously Fixed Nominal Wage
- 2.2.5 Both prices and wages inﬂexible
- 2.2.6 Analysis of this model
- 2.3 Imperfect Information Models
- 2.4 New Keynesian Models
- 2.4.1 Contracting Models
- 2.4.2 Predetermined Wages
- 2.4.3 Fixed Wages
- 2.5 Imperfect Competition and New Keynesian Economics
- 2.5.1 Macroeconomic Eﬀects of Imperfect Competition
- 2.5.2 Imperfect competition and costs of changing prices
- 2.5.3 Dynamic Models
- 2.6 Evidence and New Directions
- 2.7 Problems
- Macroeconomic Policy
- 3.1 Rules v. Discretion
- 3.1.1 The Traditional Case For Rules
- 3.2 The Modern Case For Rules: Time Consis- tency
- 3.2.1 Fischer’s Model of the Benevolent, Dissembling Gov- ernment
- 3.2.2 Monetary Policy and Time Inconsistency
- 3.2.3 Reputation
- 3.3 The Lucas Critique
- 3.4 Monetarist Arithmetic: Links Between Mon- etary and Fiscal Policy
- 3.5 Problems
- Investment
- 4.1 The Classical Approach
- 4.2 Adjustment Costs and Investment: q The- ory
- 4.2.1 The Housing Market: After Mankiw and Weil and Poterba
- 4.3 Credit Rationing
- 4.4 Investment and Financial Markets
- 4.4.1 The Eﬀects of Changing Cashﬂow
- 4.4.2 The Modigliani-Miller Theorem
- 4.5 Banking Issues: Bank Runs, Deposit Insur- ance and Moral Hazard
- 4.6 Investment Under Uncertainty and Irreversible Investment
- 4.6.1 Investment Under Uncertainty
- 4.7 Problems:
- Unemployment and Coordination Failure
- 5.1 Eﬃciency wages, or why the real wage is too high
- 5.1.1 Solow model
- 5.1.2 The Shapiro-Stiglitz shirking model
- 5.1.3 Other models of wage rigidity
- 5.2 Search
- 5.2.1 Setup
- 5.2.2 Steady State Equilibrium
- 5.3 Coordination Failure and Aggregate Demand Externalities
- 5.3.1 Model set-up
- 5.3.2 Assumptions
- 5.3.3 Deﬁnitions
- 5.3.4 Propositions
- 5.4 Problems
- Continuous-Time Dynamic Optimization

1. Consider the following model of the labor market (Diamond, 1982):

Let* L* denote the number of workers, of whom at any given moment* E* are

employed and* U* are unemployed. There are* K* jobs, of which* F* are ﬁlled

and* V* are vacant. At any given point in time, a fraction* b* of employed

workers lose their jobs. Output is* y*, the wage is* w* and the real interest

rate is* r*.

128* CHAPTER 5. UNEMPLOYMENT AND COORDINATION FAILURE
*

(a) Write down the relationship between the unemployment rate* u* =* U
*

*L*,

the vacancy rate* v* =* V
*

*K*, and the job-to-worker ration,* k* =* K
*

*L*.

Let* WE* and* WU* denote the value to the worker of being employed and

unemployed, respectively. Let* WF* and* WV* denote the value to the ﬁrm

of having job ﬁlled and having a vacancy, respectively.

(a)

(c) Assuming workers and ﬁrms split the joint surplus equally, what is

the relationship between* WE*,* WU*,* WF* and* WV* ?

(d) Write asset-pricing relationships for* WE*,* WU*,* WF* and* WV* .

(e) Solve for the fraction of output paid out as wages. How does this

quantity depend on the unemployment rate and the vacancy rate?

2. Consider the following model of the labor market. Suppose the economy

has two types of workers, skilled (*S*) and unskilled (*U*). The production

function is* Y* =* S*α

*U*β

. Let* WS* denote the nominal wage paid to skilled

workers,*WU* the wage paid to unskilled workers and* P* the price level.

Let ¯*S* denote the number of skilled workers and ¯*U* denote the number of

unskilled workers, and assume that each workersupplies one unit of labor

inelastically. The price level is perfectly ﬂexible.

(a) Solve for the wage, employment, and rate of unemployment (if any)

for both types of workers under competitive equilibrium.

(b) Now suppose that a minimum wage ¯*W* is imposed for the unskilled

workers. Solve for the wage, employment, and rate of unemployment

(if any) for both types of workers.

(c) What level of minimum wage for the unskilled workers, if any, would

a social planner who cared about the utility of a representative un-

skilled worker choose? A social planner who cared about the utility of

a representative skilled worker? One who cared about some weighted

average of the two?

Now supposed the unskilled workers are unionized. Assume that the union

gets to choose the level of the wage, after which the representative ﬁrm

gets to choose how many workers to hire. Assume that the union’s utility

function is deﬁned

by:

*Ã* ˆ*U
*¯

*!* (*W*U

*P* )1−θ

1−θ +

*Ã*1− ˆ*U
*¯

*!UI
*

(5.22)

where ˆ*U* is the number of unskilled workers employed and* UI* is the (ex-

ogenous) level of unemployment insurance.

*5.4. PROBLEMS
*

129

(a)

(e) Provide some justiﬁcation for this objective function.

(f) Conditional on the wage, solve for the ﬁrm’s maximization problem

for how many people to hire.

(g) Knowing how the ﬁrm will solve its maximization problem, solve for

the level of the wage the union will choose. Then solve for the rate

of unemployment in the unskilled sector.

3. Let’s consider the following model of unemployment through job creation

and matching, due to Christopher Pissarides. We will break the problem

into two parts, ﬁrst focusing on the workers, and then focusing on the

ﬁrms.

Suppose there are* L* workers. At a given time, a worker may be employed

or unemployed. If a worker is employed, he or she receives a wage* w*, but

there is a constant probability λ that his or her job may be eliminated. If

unemployed, the worker receives unemployment insurance* z*. With proba-

bility θ*q*(θ), the worker ﬁnds and accepts job. θ =* v
*

*u*, where* v* is the ratio

of job vacancies to the labor force and* u* is the unemployment rate.

(a) Write down the equation for how the unemployment rate evolves over

time.

(b) Solve for the equilibrium unemployment rate

(c) Assuming the discount rate is* r*, and letting* E* denote the value to

the worker of being employed and* U* the value of being unemployed,

write down the Bellman equations for the worker.

Now consider the ﬁrm’s problem. If the ﬁrm has a job which is ﬁlled, the

ﬁrm produces* y* units of output and pays wage* w*. There is a constant

probability λ (the same as above) that the job will be eliminated. If the

job is eliminated, the ﬁrm does not automatically create a job by posting

a vacancy. If the ﬁrm does decide to create a job by posting a vacancy, it

pays a ﬂow cost* c* to post the vacancy. With probability* q*(θ) it ﬁlls the

vacancy

(a)

(e) Letting* J* denote the value to the ﬁrm of having a ﬁlled job, and* V
*the value of having a vacancy, write down the Bellman equations for

the ﬁrm.

(f) In equilibrium,

(N.B. You can go on to solve for the equilibrium job vacancy rate, but we

won’t do that in this problem).

130* CHAPTER 5. UNEMPLOYMENT AND COORDINATION FAILURE
*

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