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    This document explains C. Romer numbers using different macroeconomic models. It first shows that a standard model where Y=(c0+I+G-c1T)/(1-c1) implies c1 is changing across quarters or a different model is needed, as Romer's numbers generally increase with a one unit rise in G. It then presents an alternative habit formation model where consumption depends on past consumption, C(t)-C(t-1)=a(C(t)*-C(t-1)) with C(t)*=c0+c1Y(t) and 0<a<=1. This model yields the solution Y(t)=c0+(1-a)C(

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    This document explains C. Romer numbers using different macroeconomic models. It first shows that a standard model where Y=(c0+I+G-c1T)/(1-c1) implies c1 is changing across quarters or a different model is needed, as Romer's numbers generally increase with a one unit rise in G. It then presents an alternative habit formation model where consumption depends on past consumption, C(t)-C(t-1)=a(C(t)*-C(t-1)) with C(t)*=c0+c1Y(t) and 0<a<=1. This model yields the solution Y(t)=c0+(1-a)C(

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    20 views6 pages

    MIT14 02S14 Roomer Num PDF

    Uploaded by

    Fa Rid
    This document explains C. Romer numbers using different macroeconomic models. It first shows that a standard model where Y=(c0+I+G-c1T)/(1-c1) implies c1 is changing across quarters or a different model is needed, as Romer's numbers generally increase with a one unit rise in G. It then presents an alternative habit formation model where consumption depends on past consumption, C(t)-C(t-1)=a(C(t)*-C(t-1)) with C(t)*=c0+c1Y(t) and 0<a<=1. This model yields the solution Y(t)=c0+(1-a)C(

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    of 6

    Explaining C.

     Romer Numbers
     

    (Slide 25 IS/LM)
     

    1
    Using Model from Class 
    • Y= (c0+I+G‐c1T)/(1‐c1) 
     
    • One unit increase in G increases Y by 1/(1‐c1) 
     
    • Inconsistent with numbers from C. Romer which 
    are generally increasing 
     
    • Implies c1 changing across quarters 
     
    • Or generated by different model  

    2
    Response to Permanent Increase in G

    c1=0.3 Standard Model


    1.5

     
    1
    .5
    0

    0 5 10 15 20 25
    Q

    change_in_G change_in_Y

    3
    Alternative Habit Formation Model
     
    • C (t) ‐ C (t‐1) = a  ( C (t) * ‐ C (t‐1) ) 
    – with C (t) * = c0+ c1Y (t) 
    – 0 < a <= 1 
    – For a = 1,  C (t) = C (t) * 
    • Y ( t) = C (t) + G (t) 
     
    • Solution: Y ( t) = c0 + (1‐a)C(t‐1) + G (t)/(1‐ac1)
     

    4
    Response to Permanent Increase in G

    c1=0.3, a=0.5 Habit Formation


    0 .2 .4 .6 .8 1 1.2 1.4 1.6 1.8 2

    0 5 10 15 20 25
    Q

    change_in_Y change_in_G

    5
    MIT OpenCourseWare
    http://ocw.mit.edu

    14.02 Principles of Macroeconomics


    Spring 2014

    For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.

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