Macroeconomics I

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Macroeconomics I

• Laura Bottazzi
• Bologna University

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Organizational details

• Books
• Blanchard, Olivier J. and Stanley Fisher (1989),
  Lectures on Macroeconomics, M.I.T. press
  (hereafter BF)(suggested)
• Deaton, Angus (1992), Understanding Consumption,
  Oxford University Press (hereafter Deaton)
• Ljungqvist, Lars and Thomas J. Sargent (2004),
  Recursive Macroeconomic Theory, 2nd edition,
  M.I.T. press (hereafter LS) (suggested)

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• Instructor Laura Bottazzi
• Email address bottazzi_at_spbo.unibo.it
• Office hours by appointment

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Course Requirements and Grades

• Two requirements for this class
• Problem sets (30)
• Final Exam (70)

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• Outline of the Course
• Introduction Some Stylized Facts and Some
  Puzzles
• 2. Complete Markets and Perfect Risk Sharing
• (a) Theory Representative agent
• (b) Empirical Implications Complete
  consumption insurance

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• 3. The Permanent Income/ Life Cycle Model
• (a) Theory
• i. Certainty Equivalence
• ii. Precautionary Savings and Liquidity
  Constraints
• iii. The Role of Demographics
• iv. Consumption and Labor Supply
• v. Consumer Durables
• (b) Empirical Implications

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• 4. Foundations for Stochastic Earnings Processes
• (a) Theory
• (b) Empirical Implications

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• 5.Extensions of PILCH Models to General
  Equilibrium
• (a) Theory
• i. No Aggregate Uncertainty
• ii. Aggregate Uncertainty and
  Quasi Aggregation
• iii. Business Cycle and Asset
  Pricing Implications
• (b) Quantitative Policy Analysis

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• 6. Complete Markets with Informational or
  Enforcement Frictions
• (a) Private Information
• (b) Limited Enforcement

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• Stylized Facts and Some Puzzles
• - Aggregate Data
• 60-70 of GDP is used for private consumption
  expenditure
• - Fraction fairly stable, but upward trend
  starting in the 80's and continuing through 90's

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• Decline in the personal savings rate sp, which is
  defined as
• sp 1 Cp/Ypdi
• where Cp is total private consumption
  expenditures and Ypdi is personal disposable
  income

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Consumption over the Cycle

• Consumption is smoother over the business cycle
  than GDP Indicates households' (limited) ability
  to isolate their consumption path from income
  fluctuations induced by the business cycle.
• Nondurable consumption least volatile, then
  servicespurchases of consumer durables fluctuate
  most over the cycle

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Composition of Consumption

• Consumer durables make up about 13 of total
  nominal consumer expenditures, fraction slightly
• increasing
• Fraction devoted to nondurables declined, now
• about 30
• Expenditures for consumer services about 60 of
  total consumer expenditures now, increasing

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• BUT use of nominal data misleading because of
  changes in relative prices. Now deflate
  components by their relative price (data from
  1987)
• - Consumers seem to reallocate
  consumption towards durables, away from
  nondurables
• - Reconciliation with first graph relative
  price of services has increased

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Empirical Findings from Micro Data

• Data Sources for the U.S
• Consumer Expenditure Survey (CEX) or (CES)
• - Conducted by the U.S. Bureau of the Census
  and sponsored by the Bureau of Labor Statistics
• Detailed consumption expenditure data
• Yearly from 1980 onwards ources for the U.S.
• 3000 to 5000 representative households
• - Rotating panel (no panel dimension to speak
  of )
• Bad income and wealth data
• http//www.stats.bls.gov/csxhome.htm.

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Survey of Consumer Finances (SCF)

• - Conducted by the National Opinion Research
  center at the University of Chicago and sponsored
  by the Federal Reserve system.
• Detailed information about households' income and
  wealth
• Triennial, available surveys are from 1989, 1992,
  1995 and 1998
• About 4,000 households, a representative part and
  a part that oversamples rich households (key for
  wealth data)
• No consumption data, no panel dimension
• - http//www.federalreserve.gov/pubs/oss/oss2/9
  8/scf98home.html

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Panel Study of Income Dynamics (PSID)

• Conducted by the Survey Research Center,
  University of Michigan, sponsored by NSF.
• Detailed information about income and wealth
  (although inferior to SCF).
• Annual survey, started in 1968 with
  representative sample of 5,000
• U.S. households
• In 1990 representative sample of Latinos added
• The same individuals followed over years
• New households are added, now size is about 8700
  households
• Some information on consumption (food at home and
  away)
• http//www.isr.umich.edu/src/psid/index.html

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Current Population Survey (CPS)

• Conducted by the U.S. Bureau of the Census and
  sponsored by the Bureau of Labor Statistics
• Detailed information about household income
• Annual survey (the so-called March supplement)
• started in 1948, but comprehensive
  information
• only since 1970's
• Representative sample of 40,000 to 60,000
  households
• No consumption or wealth information, no panel
  dimension
• http//www.bls.census.gov/cps

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Data Sources for Europe (Very Selected)

• - Family Expenditure Survey (FES) for the U.K.
  Very similar in scope to the American CEX.
• Socio-Economic Panel (SOEP) for Germany. Very
  similar in scope to the American PSID.
• Einkommens- und Verbrauchssichprobe for
  Germany.Similar to the American CEX, but less
• frequent.
• - Many other data sets for other European
  countries.

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Main Findings

• Lifecycle Profiles
• Disposable income follows a hump over life
  cycle,peak at age of 45.
• Average income at age 45 is almost 2.5 times as
  at age 25. The average household at age 65 has
  only 60 of income as the average household at
  age 45.
• Consumption follows a hump over the life cycle.
• Consumption seems to track income over the life
  cycle. So-called excess sensitivity puzzle
  consumption appears to be excessively sensitive
  to predicted changes in income.
• But family size is also hump-shaped over the
  lifecycle. Is there a puzzle?

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• Other Facts/Puzzles
• 1. Excess Smoothness Puzzle if the income
  process
• of households is difference stationary then a
  shock
• to current income translates one to one into
  a
• shock to permanent income and hence should
  induce a
• large shock to consumption. With these income
  processes consumption should be as volatile as
  income, but consumption is smoother than income.
  Is consumption too smooth"?
• 2. Lack of Decumulation Puzzle A significant
  fraction of very old households hold large
  portfolio of
• financial and real estate assets. Why don't
  these
• households decumulate their assets, as
  standard
• life-cycle theory predicts?

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• 3. Drop of Consumption Puzzle As people retire,
  their consumption drops by about 15
• 4. Portfolio Allocation Puzzles
• (a) Median wealth US household has portfolio
  concentrated in its own home, rest in low-return
• checking or savings accounts (rather than
  stocks).
• (b) Gross and Souleles (2000) a significant
  fraction
• of the population has simultaneously high
  interest
• credit card debt and liquid, low return assets.

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• 5. Default Puzzle the US legal system allows
  households to file for personal bankruptcy. Under
  Chapter 7 households are discharged of their
  debts, not required to use future labor income to
  repay the debt and can keep their assets below an
  exemption level. About 1 of all households per
  year file for personal bankruptcy. White (1998)
  computes that 15 (up to 25) of all US
  households would financially benefit from filing
  for bankruptcy.

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• Introduction to Dynamic Programming1 Introduction
• The elements of a dynamic problem are X, G, F,
  ß where
• X is the set of possible states
• G is the feasible correspondence for todays
  state x into tomorrows
• state y , i.e. given x, y is feasible ? y ? G (x)
• F is the period return function
• ß is the discount factor
• The sequence problem (SP)
• V (x0) max
• xt18t0
• 8 Xt0
• ßtF (xt, xt1)
• s.t. xt1 ? G (xt) ?t 0
• x0 given