Scribd
Upload
99 views18 pages

EC744 Lecture Note 1: Prof. Jianjun Miao

This document provides an overview of deterministic and stochastic growth models as well as competitive equilibrium growth models. It discusses the social planner's problem, dynamic programming approaches, and conditions for a Pareto optimal and competitive equilibrium. Key topics covered include the Euler equation method, steady states, transition dynamics, and recursive competitive equilibriums. The document also provides several exercises related to formulating different economy structures and proving welfare theorems.

Uploaded by

binicle
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
99 views18 pages

EC744 Lecture Note 1: Prof. Jianjun Miao

This document provides an overview of deterministic and stochastic growth models as well as competitive equilibrium growth models. It discusses the social planner's problem, dynamic programming approaches, and conditions for a Pareto optimal and competitive equilibrium. Key topics covered include the Euler equation method, steady states, transition dynamics, and recursive competitive equilibriums. The document also provides several exercises related to formulating different economy structures and proving welfare theorems.

Uploaded by

binicle
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 18

EC744 Lecture Note 1 Overview

Prof. Jianjun Miao

Deterministic Growth Model


X

max

tU (Ct) subject to

t=0

Ct + It F (Kt, Nt) , K0 > 0 given,

Kt+1 = (1 ) Kt + It, 0 Nt 1.

Assumptions: 1. F : R2 R+ is homogeneous of degree one, strictly increasing, and + strictly concave, with F (0, N ) = 0, lim FK (K, 1) = , lim FK (K, 1) = 0.
K0 K

2. U : R+ R is bounded, U 0 > 0, U 00 < 0, and limC0 U 0 (C) = .

Reformulation:

Dene f (K) = F (K, 1) + (1 ) K. f (0) = 0, f 0 (K) > 0, lim f 0 (K) = , lim f 0 (K) = 1
K0 K

Planners problem max

{Kt+1}t=0 t=0

tU (f (Kt) Kt+1)

subject to 0 Kt+1 f (Kt) , K0 given.


Example: f (K) = K , U (C) = ln (C) . Solution Kt+1 = Kt .

Euler Equation Method:

Finite horizon problem


{Kt+1}T t=0 t=0

max

T X

tU (f (Kt) Kt+1)

subject to 0 Kt+1 f (Kt) , K0 given. FOC and Boundary conditions U 0 (f (Kt) Kt+1) = f 0 (Kt+1) U 0 (f (Kt+1) Kt+2) , t = 0, ..., T 1, KT +1 = 0, K0 > 0 given. Taking limit T yields the solution to the innite horizon problem?

Dynamic Programming Method:

Period T : V0 (KT ) = Thus, KT +1 = 0.


0KT +1f (KT )

max

U f (KT ) KT +1

Period T 1 :

V1 KT 1 =

U f KT 1 KT + V0 (KT ) max 0KT f (KT 1)

Period 0 : VT (K0) =
0K1f (K0)

max

U (f (K0) K1) + VT 1 (K1)

Innite-Horizon Dynamic Programming (T ): Value function V : R+ R V (K0) = max U (C0) + V (K1)


C0,K1

subject to C0 + K1 f (K0) , C0, K1 0, K0 > 0 given. Rewrite it as Bellman equation: V (K0) = or V (K) =
0K1f (K0)

max

U (f (K0) K1) + V (K1)

0K 0f (K)

max

0 + V K 0 U f (K) K

Questions: Existence and Properties of V ? Policy function K 0 = g (K)? FOC and Envelope condition? U 0 (f (K) g (K)) = V 0 (g (K)) , V 0 (K) = f 0 (K) U 0 (f (K) g (K)) .

Deterministic dynamic system: Kt+1 = g (Kt) Steady State: K = g (K ) , Stability, Convergence, Linear approximation? Example: f (K) = K , U (C) = ln (C) .

Stochastic Growth Model

max E

t=0

tU (Ct) subject to

Ct + Kt+1 ztf (Kt) , K0 > 0 given.

Assumptions:

At the beginning of period t, (Kt, zt) is observed. Contingency plans (adapted processes)

Dynamic Programming: V (K, z) =


0K 0 f (K)

max

h i 0 + E V K 0, z 0 | (K, z) . U zf (K) K

FOC

h i 0 (zf (K) g (K, z)) = E V g (K, z) , z 0 | (K, z) . U 1

Stochastic dynamics Kt+1 = g (Kt, zt) , rst-order Markov process


Example: U (C) = ln (C) , f (K) = K = Kt+1 = ztKt

Steady state?

(K0, z0) known, zt is IID drawn from distribution G


K1 = z0K0 is deterministic.

The distribution of K2,


2 (a) = Pr {K2 a} = Pr {z1K1 a} = Pr {z1 a/ (K1 )} = G (a/ (K1 ))

Transition function H (a, b) = Pr {Kt+1 a|Kt = b} = G (a/ (b)) The sequence of distributions t+1 (a) = Pr {Kt+1 a} =

H (a, b) d t (b)

Invariant (stationary) distribution

Z 0 = 0, K d (K) K H K

Does { t} converges to ? In what sense? Uniqueness? Empirical testing, LLN

Z T 1 X lim (Kt) = (K) d (K) T T t=1

Competitive Equilibrium Growth


Pareto optimum and Competitive equilibrium Market arrangements Suppose nite horizon T {(Ct, Kt+1)}T is the solution to the social planner problem t=0

Arrow-Debreu Economy (Household Own Capital)

Firms = max subject to yt F (kt, nt) Household

t=0

T X

pt [yt rtkt wtnt]

max subject to
T X

t=0

T X

tU (ct)

t=0

pt (ct + it)

t=0

kt+1 = (1 ) kt + it, 0 nt 1.

T X

pt (rtkt + wtnt) + ,

Competitive equilibrium Prove


n
e ce, kt+1 t

e e e ce, kt+1, pe, wt , rt t t

is P.O.

Prove there exist prices to support P.O. allocation {Ct, Kt+1} as a competitive equilibrium

Exercise 1: Suppose rms own initial capital k0 and make investments. Households trade rms shares. Formulate and characterize competitive equilibrium.

Radner Economy (Households Own Capital)

Sequence markets, trade Arrow securities (bond)


0 0 The bond price is qt = U 0 c t+1 /U (ct ) = 1/f kt+1

Radner Economy (Firms Own Capital)

Sequence markets, trade rm shares

Exercise 2: Describe the above two Radner economies and market structure in detail. Formulate the household and rm problems and dene equilibria. Prove the two welfare theorems.

Recursive Equilibrium (Little k Big K Approach)

Economy-wide capital K, Individual capital k Factor prices R (K) = F1 (K, 1) , (K) = F2 (K, 1)

State variable (K, k)

v (k, K) = max U (c) + v k0, K 0 c,y

subject to

c + k0 (1 ) k R (K) k + (K) , K 0 = H (K) .

Decision rule (policy function) k0 = h (k, K)

A recursive competitive equilibrium consists of a value function v : R2 + R, a policy function h : R+ R+ for the representative household, an economy-wide law of motion H : R2 R+ for capital, and factor price + functions R : R+ R+ and : R+ R+, such that v satises DP; h is the optimal policy function; R and satisfy rms problem; Markets clear h (K, K) = H (K) .

Exercise 3: (i) Prove that the recursive competitive equilibrium allocation is Pareto optimal: V (K) = v (K, K) , g (K) = H (K) (ii) Prove that a Pareto optimum can be supported as a recursive equilibrium: V (K) = v (K, K) , g (K) = h (K, K) .

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy