dynamic models in economics

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introductory dynamic macroeconomics ragnar nymoen university of oslo 10 august 2008 ii contents preface v 1 dynamic models in economics 1 1.1 introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 statics and dynamics in economic analysis . . . . . . . . . . . . . . . 3 1.3 the short-run and the long-run 12 1.4 short-run and long-run models 16 1.5 stock and flow variables 19 1.6 an empirical example of a static and dynamic equation 23 1.6.1 a static consumption function 23 1.6.2 a dynamic consumption function 27 1.7 summary and overview of the rest of the book 29 2 linear dynamic models 31 2.1 the adl model and dynamic multipliers 31 2.2 an empirical example: dynamic …

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104 3.4 summing up the open economy model 111 3.5 norwegian evidence 112 3.5.1 a phillips curve model 113 3.5.2 an error correction wage model 117 3.6 the new keynesian phillips curve 119 3.6.1 the ‘pure’ npc model 119 3.6.2 a npc system 122 3.6.3 the hybrid npc model 124 3.6.4 the empirical status of the npc model 124 a variables and relationships in logs 131 b linearization of the solow model 137 preface these notes are written for the course econ 3410 /4410 introductory dynamic macroeconomics at the university of oslo. they contain a presentation of the key concepts and models required for starting to address positive macrodynamics in a systematic way, for example in connection with the master thesis in economics. the level of mathematics used does not go beyond basic calculus and simple algebra. several students and colleagues have already contributed to this project by of- fering …

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many areas of economics time plays an important role: firms and households do not react instantly to changes in for example taxes, wages and business prospects but take their time to make decisions and to adjust behaviour. moreover, because of information lags, time often goes by before changes in economic circumstances are recognized and some sort of adaptive action is taken by economic agents (households, firms and the government). there are also institutional arrangements, social and legal agreements and social norms which imply that we will expect gradual adjustment to be typical of economic behaviour. annual or biannual wage bargaining is one important example of such an institution, responsible for intermittent pay raises at the individual level, and smooth wage development at the aggregate level. the manufacturing of goods is not instantaneous—although economists often formulate models as if production is instantaneous—but takes considerable time, even years in the case of …

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o time lags, to changes in the net supply of currency to the central bank. the hallmark of dynamic adjustments therefore, is not that the response to a shock is necessarily delayed, but that the adjustment process takes several time periods. the effects of shock literary ‘spill over’ to the following periods. using the the terminology of ragnar frisch, who formalized macrodynamics as a dicipline, we can speak of impulses to the macroeconomic system which are propagated by the system’s own mechanism into effects that lasts for several periods after the occurrence of the shock.1 because dynamic behaviour and response patterns are regular features of the macroeconomy, all serious policy analysis is based on a dynamic approach. hence, those responsible for fiscal and monetary policy use dynamic models as an aid in their decision process. in recent years, monetary policy has come to play an important role in activity regulation, …

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frisch’s many influential publications is called propagation problems and impulse prob− lems in dynamic economics, frisch (1933). 2 see norges bank’s web page on monetary policy: http://www.norges- bank.no/english/monetary_policy/in_norway.html. similar statements can be found on the web pages of the central banks in e.g., autralia, new- one important goal of this book is to learn enough about dynamic modeling to be able to understand the economic meaning of this and similar statements, and to be able to form an opinion about their realism. the quotation from norges bank is demonstrates that policy is guided by the beliefs the decision makers have about the response lag between a policy change and the effect on the target variable—in other words the dynamic nature of macro- economic relationships. formalization of such beliefs require that we develop the necessary modelling tools and concepts. we continue this chapter by giving the classic definition of static and …

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introductory dynamic macroeconomics ragnar nymoen university of oslo 10 august 2008 ii contents preface v 1 dynamic models in economics 1 1.1 introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 statics and dynamics in economic analysis . . . . . . . . . . . . . . . 3 1.3 the short-run and the long-run 12 1.4 short-run and long-run models 16 1.5 stock and flow variables 19 1.6 an empirical example of a static and dynamic equation 23 1.6.1 a static consumption function 23 1.6.2 a dynamic consumption function …

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