Академический Документы
Профессиональный Документы
Культура Документы
International Macroeconomics
Columbia University
May 1, 2016
1
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Thus far:
CA = S − I
This chapter:
2
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
S = Sp + Sg
S p = private savings
S g = government savings (i.e., fiscal surplus)
3
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
What do the data show about the joint occurrence of current account
and fiscal deficits?
4
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
5
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
−50
−100
CA
t
−150
1960 1965 1970 1975 1980 1985
Year
6
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
... and at the same time the U.S. fiscal surplus, S g , declines:
50
← 1981
0
Billions of Dollars
−50
−100
−150
−200
Sg
t
−250
1960 1965 1970 1975 1980 1985
Year
7
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
50
← 1981
0
Billions of dollars
−50
−100
CA−CA1981
Sg−Sg
1981
−150
1977 1978 1979 1980 1981 1982 1983 1984 1985
Year
8
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
9
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
10
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
0
%
−5
−10
Sg / GDP
CA / GDP
−15
1940 1942 1944 1946 1948 1950
11
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
−2
−4
−6
1992 1994 1996 1998 2000
12
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
−2
−4
%
−6
−8
−10 Sg / GDP
CA / GDP
−12
2002 2004 2006 2008 2010 2012
13
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
−2
−4
%
−6
−8
−10
−12
Government Savings / GDP
Current Account / GDP
−14
1930 1940 1950 1960 1970 1980 1990 2000 2010
14
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
15
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
If Btg < 0, then the government is indebted, and if Btg > 0 the
government is a creditor.
16
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Uses of funds:
• government spending, Gt
g
• interest service on the debt, −rt−1Bt−1
Sources of funds:
• tax revenues, Tt
• issuance of new debt,−(Btg − Bt−1
g
)
17
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
g
Borrowing limit: B2 = 0
18
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Some definitions:
19
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
G2 T2 g
G1 + = T1 + + (1 + r0)B0
1 + r1 1 + r1
20
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Households
p
The transversality condition is B2 = 0
21
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
22
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
23
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Equilibrium
24
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
r1 = r ∗ .
That is, the presence of a government sector does not alter the fact
that the domestic interest rate must be equal to the world interest
rate r∗. It follows that in the small open economy fiscal deficits will
not drive up interest rates.
25
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Q: There are 5 unknowns, {C1, C2, r1, T1, T2}, but only 4 equilibrium
conditions, how can this be?. Notice that the equilibrium conditions
T2
depend only on the present discounted value of taxes, T1 + 1+r ,
1
and thus only the present discounted value of taxes is uniquely
determined, but T1 and T2 individually are not.
26
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
27
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
← C2=(1+r*)(Q1−C1−G1)+Q2−G2
C2
C1 C1
(B0p + B0g = 0)
28
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
From here it follows that tax cuts that lead to an increase in the
fiscal deficit, G1 − T1, will have no real effects and will not lead to a
current account deterioration. That is, they do not give rise to the
Twin Deficit phenomenon.
29
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
G2 T2 g
G1 + = T1 + + (1 + r0)B0
1 + r1 1 + r1
g
WLG assume B0 = 0. Use equilibrium condition r1 = r∗ and consider
changes
30
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Then
∆G2 ∆T2
∆G1 + = ∆T1 +
1 + r∗ 1 + r∗
∆T2
0 + 0 = ∆T1 +
1 + r∗
This says that tax cut in period 1 must leave the present discounted
value of taxes unchanged. This in turn requires that
31
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
∆C1 = 0
32
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Why do households choose to save the entire tax cut, why don’t
they consume at least some of it?
The result that a tax cut in the current period that leaves government
spending unchanged has no real effects, that is, leaves the consumption
allocation unchanged, is known as Ricardian Equivalence.
33
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
p g
National Saving = S1 = St + S1
g p
Recall that ∆S1 = ∆T1 and ∆S1 = −∆T1.
34
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Use
CA1 = S1
so that
∆CA1 = ∆S1 = 0
35
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
36
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Taking stock:
What does the data show? In the 1980s there was a significant cut
in taxes. As predicted by theory, the tax cuts were accompanied by
a significant decline in public savings.
37
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
38
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Assume now that the fiscal deficit is not the result of a tax cut, but
instead is brought about by an increase in government spending.
39
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
C2
← C =(1+r*)(Q −C −G ) +Q −G
2 1 1 1 2 2
∆ G1
C2 A
B
C′
2
′
C1 C C
1 1
40
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
41
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Let’s see if we could explain the size in the decline in the current
account in the early 1980s by the observed size of the increase in
government spending.
1. Borrowing Constraints
2. Intergenerational Effects
3. Distortionary Taxation
43
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
p
Period 1 budget constraint: C1 + B1 = Q1 − T1.
p
Period 1 borrowing constraint: B1 ≥ 0.
Consider now a tax cut, ∆T1 < 0. Then ∆C1 = −∆T1 > 0 and
p
∆S1 = ∆Q1 − ∆T1 − ∆C1 = 0, that is, households consume the tax
cut rather than save it (which is what they would do in the absence
of binding borrowing constraints).
44
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
C2
L L′
o B
C2
B′
C1
2
←∆ T1→ A
C2
L L′
Co C1
1 C
1
C1
1
45
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
g p
What is the effect on national savings? S1 = S1 + S1, and we have
g p
∆S1 = ∆S1 + ∆S1 = ∆T1 < 0. National savings fall.
46
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Generation that benefits from the tax cut not the same as the one
that pays for the future tax increases.
47
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Policy Experiment:
∆T2
By govt budget constraint: ∆T1 = − 1+r
1
In period 1:
p
∆S1 = ∆Q1 − ∆T1 − ∆C1
g
∆S1 = ∆T1
p g
⇒ ∆S1 = ∆S1 + ∆S1 = ∆T1 < 0, national savings declines same as
gov’t savings
and hence
g
∆CA1 = ∆S1 = ∆S1 < 0
The tax cut gives rise to a fiscal deficit and a current account
deterioration of the same magnitude, generating a Twin Deficit.
48
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
49
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
HH problem
max U (C1, C2)
{C1 ,C2 }
subject to (8) taking as given Q1, Q2, τ1, τ2, and r1.
Optimality conditions:
1 + τ2 Q2
(1 + τ1)C1 + C2 = Q1 + (8)
1 + r1 1 + r1
!
U1 (C1, C2) 1 + τ1
= (1 + r1) (9)
U2 (C1, C2) 1 + τ2
1+τ1
Notice that now there is a wedge, 1+τ2 , between the MRS and
the interest rate.
50
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
1+τ1
If ↓, then all else equal, household should increase C1 and
1+τ2
decrease C2. It follows that a cut in τ1 most likely leads to a decline
in the trade balance and hence the current account in period 1
implying that Ricardian equivalence fails.
To see that the tax cut, τ1 ↓, does not result in an income effect in
equilibrium, we need to derive the economy wide resource constraint.
To obtain this, first consider the budget constraint of the government.
51
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
53
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Let’s go back to the Reagan deficits of the early 1980s. And see
if we can say anything further whether the U.S. current account
deficits were indeed linked to a decline in desired national savings in
the U.S.
54
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
In the early 1980s there were 2 prevailing views regarding the emergence
of large U.S. current account deficits. One was that the CA deficits
were the consequence of factors external to the United States and
the other was the Twin Deficit hypothesis.
View 1: The rest of the world wanted to save more. That is, the
CA schedule of the rest of the world shifted to the left.
The U.S. current account in the 1980s: View 1 The rest of the
0
world wanted to save more, the CARW shifts to the left to CARW .
CA
RW′
CARW r
US
CA
o
r*
1
r*
RW 1 o US
CA US 0 US CA
CA CA
56
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Why?
57
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
US
CA
r*1
r*o
RW 1 o US
CA US 0 US CA
CA CA
58
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Note that under view 1 the interest rate declines whereas under view
2 the interest rate increases.
59
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
−2
1970 1975 1980 1985
Year
Note: The real interest rate is measured as the difference between the 1-year constant maturity
60
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
62
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Notice that there is more than one possible choice for the pair
(τ1, τ2) such that the government can finance its expenditures G1
and G2. How should the government pick its tax rates? Suppose the
government is benevolent, that is, it sets (τ1 , τ2) to bring about that
equilibrium in which — given G1 and G2 — utility is highest. The
problem of the government in this case is known as the Ramsey
problem. How can we find that equilibrium?
63
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
64
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Formally, we define an equilibrium as values for C1, C2, τ1, τ2, and
r1 that satisfy
1 + τ2 Q2
(1 + τ1)C1 + C2 = Q1 + (8)
1 + r1 1 + r1
!
U1 (C1, C2) 1 + τ1
= (1 + r1) (9)
U2 (C1, C2) 1 + τ2
τ2 G2
τ1C1 + C2 = G1 + (10)
1 + r1 1 + r1
and
r1 = r ∗ (11)
given G1 , G2 , r∗, Q1, and Q2 .
65
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
... and the Ramsey problem is to pick C1, C2, τ1, τ2, and r1 to
66
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
C2 Q2 − G2
C1 + = Q1 − G1 + (12)
1 + r∗ 1 + r∗
67
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
68
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
C2 = (1 + r∗)(Y − C1)
Use this expression to eliminate C2 from the objective function, and
our maximization problem becomes
This is a problem in one unknown, just like the one studied ever
since chapter 3.
69
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
Now we claim that any pair (C1, C2) that satisfies (12) and (13),
also is a solution to the Ramsey problem introduced earlier.
If we pick
τ1 = τ2
then (13) implies that constraint (9) holds.
70
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
71
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
72
International Macroeconomics, Chapter 7 Schmitt-Grohé, Uribe, Woodford
73