复旦大学：《宏观经济学》课程教学讲义（PPT）Politico-Economic Equilibrium and Economic Growth

Politico-Economic Equilibrium and Economic Growth 复9大学经学院

Politico-Economic Equilibrium and Economic Growth

Part 1: Background Data show that growth g performances are very different cross countries g. There are at least three approaches to explain the differences s Endowment Approach(e.g.i Acemoglu and Zilibotti, 2001, 3 QJE 4s Multiple Equilibria Approach (e.gr Azariadis and Drazen, 1990, QJE

Part 1: Background ❖ Data show that growth performances are very different cross countries. ❖ There are at least three approaches to explain the differences. ❖ Endowment Approach (e.g. Acemoglu and Zilibotti, 2001, QJE) ❖ Multiple Equilibria Approach (e.g. Azariadis and Drazen, 1990, QJE) Policy Approach (e.g. Barro

Policy Approach s Public policies may have huge g impacts on economic growth &For example, increasing capital tax rate drops the interest rate and then depresses physical capital accumulation. Higher wage tax rate has the same effect on human capital accumulation &The following question comes naturally:W thy countries adopt different public policies (or non-5 optimal policy)?

Policy Approach ❖ Public policies may have huge impacts on economic growth. ❖ For example, increasing capital tax rate drops the interest rate and then depresses physical capital accumulation. Higher wage tax rate has the same effect on human capital accumulation. ❖ The following question comes naturally: why countries adopt different public policies (or non￾optimal policy)?

Political Economy .Public Policy is endogenously generated from political economy rather than an abstract benevolent government &A number of theories tell us how public policies are determined in a political economy (a survey see Persson and Tabellini'si book, 2000, MIT The" Median voter Theorem”s学 the most popular one to pin 4 down the politico-economic iF equilibrium

Political Economy ❖ Public Policy is endogenously generated from political economy rather than an abstract benevolent government. ❖ A number of theories tell us how public policies are determined in a political economy (a survey see Persson and Tabellini’s book, 2000, MIT). ❖ The “Median Voter Theorem” is the most popular one to pin down the politico-economic equilibrium

Part 2: A Basic Model & Environment: Consider a Three go Period economy. Only one generation lives in each period Every generation consists of a skillful and a unskillful family(S and U henceforth). S in the current period gives birth to S in the next period, so as UN Generations Family or periods Skillful Unskillful Skillful Unskillful 2 Skillful Unskillful 复9大学经学院

Part 2: A Basic Model ❖ Environment: Consider a Three￾Period economy. Only one generation lives in each period. Every generation consists of a skillful and a unskillful family (S and U henceforth). S in the current period gives birth to S in the next period, so as U. Skillful Skillful Skillful Unskillful Unskillful Unskillful Family 1 Generations (or periods) 2 3

Preference sS is altruistic towards her children (also skilful) in the following generations, so as U. Therefore, S and u in the first two generations would like to leave bequest to the their own children in the following generations 复9大学经学院

Preference ❖ S is altruistic towards her children (also skillful) in the following generations, so as U. Therefore, S and U in the first two generations would like to leave bequest to the their own children in the following generations

Capital, Technology and Policy -Capital: The first generation is born with certain level of capital Their bequests form the capital held by the second generation whose bequest consequently form the capital held by the last generation s Technology: Assume small open i economy so that interest rate and a wage rate are both exogenously x gIven o Policy Set: Flat-rate capital income tax is collected to balance 学经学院 the transfer payment, which is

Capital, Technology and Policy ❖ Capital: The first generation is born with certain level of capital. Their bequests form the capital held by the second generation, whose bequest consequently form the capital held by the last generation. ❖ Technology: Assume small open economy so that interest rate and wage rate are both exogenously given. ❖ Policy Set: Flat-rate capital income tax is collected to balance the transfer payment, which is equally distributed between S and

Backward Solution: 1 9 The Third Generations Programming maX e2) st c3-k=M+(1-x)k3+乙yk3 yields The Second Generations Programming max u 2 A() st C,'+k-k,=w+(1-t)rk,+r,rk2 k3,k,) yields:C2=C22,k2, T2, t3 复9大学经学院

The Third Generation’s Programming max ( ) . . 3 u c st i ( ) 3 3 3 1 3 3 3 c k w rk rk i i i i − = + − + yields: ( ) 3 3 3 3 3 c c k ,k , i i i = The Second Generation’s Programming max ( ) ( ) . . 2 3 u c u c st i i +  ( ) 2 2 3 2 2 2 2 c k k w 1 rk rk i i i i i + − = + − + yields: ( ) 2 2 2 2 2 3 c c k ,k , , i i i = ( ) 3 3 3 3 3 c c k ,k , i i i = Backward Solution: 1

Backward Solution: 2 The First Generations Programming max )A(2)+m) st c1+k2k1=w+ K,+tr k 252253 yieldsaic1 (15 /17154273 k旦大学经济学院

max ( ) ( ) ( ) . . 3 2 1 2 u c u c u c st i i i +  +  ( ) 1 1 2 1 1 1 1 1 c k k w rk rk i i i i i + − = + − + The First Generation’s Programming ( ) 2 2 2 2 2 3 c c k ,k , , i i i = ( ) 3 3 3 3 3 c c k ,k , i i i = yields: ( ) 1 1 1 1 1 2 3 c c k ,k , , , i i i = Backward Solution: 2

Backward Solution: 3 Note that in order to mimic the competitive equilibrium, we assume there is no strategic behavior between S and U in each period The model is closed by k.= S tk Finally, we can get three generations indirect utility functions (k1,k1 1515233 22253 复9大学经学院

( ) 2 2 2 2 2 3 v v k ,k , , i i i = ( ) 3 3 3 3 3 v v k ,k , i i i = ( ) 1 1 1 1 1 2 3 v v k ,k , , , i i i = u t s kt = kt + k Backward Solution: 3 • Note that in order to mimic the competitive equilibrium, we assume there is no strategic behavior between S and U in each period. • The model is closed by: • Finally, we can get three generations’ indirect utility functions: