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August - 2011
N 0t + L0t =1
0
0
0
0
0
Pt C0t + Pt I 0t + R1
t Bt +1=W t N t +Z t K t +B t + t
Form the Lagranian and express the budget constraint in real terms.
Assume that optimizer have the following utility functions
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August - 2011
FOC
Ktal. Supply
Endogenous labor supply, a SS requires that hours per personEuler
be invariant to the level of productivity
Marginal utility on consumption
Marginal utility of wealth
v()
log ( v )
Ct =C t +1
Optimal to supply a constant number of hours when the real interest rate
is constant and wage rate grows at a constant rate.
v()
Is concave if
v()
Is convex if
To ensure the
v ()
<1
>1
concavity:
2
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August - 2011
Ktal supply
( (( ) ) )
d
Z
:1=E0 R1
t
d K t +1
P
d B0t +1
From
an
optimal
+1
t +1
C, L,N , K
K t lim t K t +1=0
t
U ( C r , Lr )
Pt CtR=W t N Rt
st.
1
1 W
= R
R
Lt C t P
( )
is high =1
0,R
U ()=ln C 0,R
t + ln Lt
N tR N Rt W
=
LRt C Rt P
LRt =1N Rt
1
Ex . N tR=
2
( ) C =( WP ) N
W 1
C =( )
P 2
t
R
t
R
t
R
t
follow
the
sequences
transversality requirement an
plans
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August - 2011
Aggregation
Ct =( 1 ) C0t + C Rt
0
N t =( 1 ) N t + N t
Ct =( 1 ) C0t +
Ct =( 1 )
[( ) ]
W R
Nt
P
( WP ) L + [ ( WP ) N ]
0
t
R
t
Ct =( ( 1 ) ( 1N 0t ) + N Rt )
( WP )
Nt
(] WP )
Ct = ( 1 ) ( 1 ) N 0t +
N tR + ( 1 ) N t0( 1 ) N 0t
Ct = N t +12
( 1 ) N 0t
2 N t
(] WP )
1
0
N t =( 1 ) N t + 2
2
2 N t=2 N 0t ( 1 )+
Ct =( N t +12 N t )
Ct =( 1N t )
( WP )
( WP )
AS of labor
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August - 2011
C R C 0
= =1
C C
The effect is on aggregation of consumption
Ct = C Rt + (1 ) Ct0
( 1+ C
^ t )+ C
R ( 1+ C
^ tR ) + ( 1 ) C
0 ( 1+ C
^ 0t )
C
R R
0 0
^ t = C C
^ t + (1 ) C C
^
C
C
C t
^ t = C
^ Rt + (1 ) C
^ t0
C
But it change because of the Euler equation
^ 0t =Et ( C
^ t +1 )r^ t
C
^ 0t =C
^ 0t +1 r^ t +w Rt +1 E t ( C
^ t+ 1) C
^ t+1
C
^ t = C
^ Rt + (1 ) C
^ t0+1 (1 ) r^ t + C
^ tR+1 C
^ rt +1
C
^ t =( 1 ) C
^ 0t +1 + C
^ Rt ( 1 ) ^
^ tR+1 C
^ rt +1
C
Rt + C
^ t+ 1
C
^ t =C
^ t +1( 1 ) ^
^ tR+1 C
^ rt +1
C
Rt + C
CtR=
^
1 W
^ tR= W
C
2 P
P
( )
( )
(( ))
^
W
^ t =C
^ t +1( 1 ) ^
C
Rt +
P
t +1
^
Rt : Intertemporal effect
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August - 2011
( WP )
t +1
: Credit restrictions
( WP )
Annex
U ( C , N )=
C 1 ( 1) v (N )
e
1
T.A.
g ( x ) =g ( x ) 1+
g ' ( x )
x ^x t
g ( x )
g ( x ) g ( x )=g '
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