A dynamic macroeconomic model for the

Macroeconomics models ppt

Instead, the aggregate downturn confronts many people with a disturbing game of chance that offers them some probability of losing an enormous amount of income as much as 50 percent or more. When requesting a correction, please mention this item's handle: RePEc:fip:fedgif Faced with this shock, the government of the oil-importing country could generate more output in a number of ways. Macroeconomists need to do more to explore models that allow for the possibility of aggregate shocks to these kinds of self-fulfilling beliefs. Macroeconomics should have been able to provide that playbook. Over the past 25 years, a great deal of work has used models that incorporate financial market frictions. These constraints prevent anyone in the economy including the government from creating something from nothing. But—almost coincidentally—in these models, all government interventions including all forms of stabilization policy are undesirable. New Keynesian models: Not yet useful for policy analysis. From August through late , credit markets tightened in the sense that spreads spiked and trading volume fell. Hence, such estimated relationships, while useful for forecasting when the macro policy regime was kept fixed, could not be of use in evaluating the impact of policy regime changes.

Without such a description, as discussed above, the models are subject to the Lucas critique. Each agent is assumed to make an optimal choicetaking into account prices and the strategies of other agents, both in the current period and in the future.

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It is common now, for example, to use models in which firms can only adjust their prices and wages infrequently. In the context of the Phillips curve, this means that the relation between inflation and unemployment observed in an economy where inflation has usually been low in the past would differ from the relation observed in an economy where inflation has been high.

Long-standing research agendas by prominent members of the profession Christopher Sims and Thomas Sargent, among others explore the consequences of relaxing the assumption.

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Federal Reserve Bank of St. If the price of oil goes up, then it is economically efficient for people in the economy to work less and produce less output. However, policymakers continued to use largely outdated models for assessing the quantitative impact of policy changes.

This analysis has led to new and important insights.

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Modern Macroeconomic Models as Tools for Economic Policy