Simple Macroeconomic Framework Research Articles

Endogenous beliefs and social influence in a simple macroeconomic framework

Endogenous beliefs and social influence in a simple macroeconomic framework

A Theoretical Consideration of the Socialist Market Economy

ABSTRACT The recent economic experience of countries such as China, Vietnam, Laos, etc., has invoked some interest in the economic system in these countries. This economic system which is often characterised as the socialist market economy is first conceptually distinguished from a centrally planned socialist economy as well as from a market socialist economy. Then a simple macroeconomic framework of a stylised socialist market economy is set out and its principal properties are highlighted. The paper concludes with a brief examination of the political economy of the socialist market economy.

Teaching the Economic Impact of COVID-19 with a Simple Short-run Macro-model: Simultaneous Supply and Demand Shocks

ABSTRACT This short note has one main ambition. It seeks to provide students with a very simple macroeconomic framework to deal with the short-term economic impact of the COVID-19 pandemic. The explanation for the unprecedented magnitude of the recession over a short span of time is to be found in the peculiar form of the shock due to the various lockdowns. Indeed, the 2020 crisis is specific in that it involved two recessive shocks simultaneously: a demand shock superimposed on a supply shock. This model is original in that although it is driven by demand it is capable of dealing with supply issues without entailing any additional technical difficulties.

Endogenous Beliefs and Social Influence in a Simple Macroeconomic Framework

This paper incorporates endogenously emerging beliefs, with an emphasis on the role of social influence, into a stylized Islands model, characterized by uncertainty and strategic complementarity generating frictional coordination. In particular, individuals can have pessimistic, neutral or optimistic beliefs and they can change these beliefs over time following a switching mechanism, driven both by economic outcomes and social influence. In such a framework, we study the emergent dynamics in order to assess the impact social influence has on agents' coordination, economic stability and welfare. We find that in the absence of social influence rational expectations are unstable and agents coordinate over time on a pessimistic and highly inefficient stationary state in which output and welfare are below the rational expectations equilibrium. As the importance of social influence grows, the steady state becomes even more pessimistic. As it crosses a certain threshold, additional equilibria emerge and the economy may converge to the rational expectations steady state, in which welfare is highest, or to a much more optimistic equilibrium, which is however not necessarily more efficient. We conclude that social influence can act as a coordination device able to smooth the impact of uncertainty and individual incentives, with positive effects on welfare.

Is There a Macroeconomic Trilemma? A Theoretical Analysis

The article examines the view in international macroeconomics that has become known as the ‘Macroeconomic Trilemma’, the ‘Impossible Trilemma’, or simply the ‘Trilemma’. According to this view, national policy makers can reach two out of three desirable states: (i) free capital flows, (ii) exchange rate stability, and (iii) monetary policy autonomy, the latter implying the ability of monetary policy to pursue a production goal. It follows from the Trilemma that national policy makers with a closed capital account, i.e. choosing not to have (i), are both able to reach exchange rate stability and to use monetary policy for the pursuit of a production goal (monetary autonomy), i.e. the two desirable states indicated by (ii) and (iii). The implication is that it will be possible with the use of only one policy instrument, i.e. monetary policy, to reach two policy goals (an exchange rate goal and a production goal). This contradicts the Tinbergen rule, according to which the number of achievable policy goals cannot exceed the number of independent policy instruments. On the basis of a simple macroeconomic framework, the article disproves this part of the Trilemma. Thus, when capital markets are closed, national policy makers can reach only one policy goal – either an exchange rate goal or an employment goal – when they control only one policy instrument, i.e. monetary policy.

The effects of shocks on the Austrian unemployment rate - a structural VAR approach

Assuming full hysteresis in the Austrian labour market, a simple macroeconomic framework is used to model the effect of four structural shocks, i.e. shocks to productivity, demand, wages and labour supply. By using SVAR analysis, we derive impulse-response functions that show the effects of these shocks on unemployment. What constitutes a distinctive feature of our study is the deliberate use of overidentifying restrictions, allowing for a likelihood ratio test. The objection to SVAR methodology, that it relies on arbitrary assumptions, can thus be overcome, as invalid sets of identifying restrictions are rejected.

Endogenous unions and governments: A game-theoretic approach

This paper applies some elements of game theory to the determination of government spending and wages within a simple macroeconomic framework where these variables are ordinarily treated as exogenous in the short run. By showing how nominal wages respond to increased government spending and taxes and vice versa, the paper attempts to explain the simultaneous tendency of many Western economies toward persistent inflation and expansion of the public sector. In particular, the paper stresses the macroeconomic consequences of the interaction between endogenous utility-maximizing governments and labour unions, and shows how the response of the economy to changes in government and union behaviour depends on the preferences of both parties with respect to inflation, employment, real disposable wages, and government spending as well as on their view of the relative magnitude of the employment and price effects of such changes.