A Dynamic IS-LM Model with Adaptive Expectations

We analyze the stability of a discrete-time dynamic model with an IS-LM structure. We assume that the Aggregate Supply function is of Lucas type, and the monetary policy rule is of Friedman type. The mechanism of expectations formation is assumed to be of adaptive type (Friedman-Cagan). In its final form, the model contains two state variables, namely money supply and expected inflation. From the mathematical point of view, it is an affine discrete-time system, whose stability properties are analyzed in the paper. We deduce sufficient conditions concerning the "learning coefficient" involved in the Friedman-Cagan type of forecast equation, so that the model is stable.steady state, Lucas type AS function, Friedman type monetary policy rule, stability conditions

The Influence of Monetary and Fiscal Policies on Social Welfare

The paper analyses the way in which monetary and fiscal policy influences the performances of economic growth and social welfare. The analysis is made on the basis of a dynamic model with discrete variables. The model is with a representative private agent and a government sector consisting of a consolidated fiscal authority and central bank. Households, in each period, decide about consumption, investment in physical capital, and financial investment in government bonds. The model is built in such a way that satisfaction of the budget constraint of the representative household implies satisfaction of the budget constraint of the government. The model has two state variables: the first is private wealth (consisting of money, bonds and physical capital), and the second is physical capital. The decision variables are: private nominal consumption, social nominal consumption and the amount of bonds bought by the private agent. The optimality conditions are obtained by using the Maximum Principle for discrete dynamic systems. A qualitative analysis of the optimal trajectories is performed, on the basis of the information provided by the Maximum Principle, concerning the dynamics of the dual variables. Finally, we analyze the influence of several monetary and fiscal decisions on the optimal trajectories of the model.Economic Growth, Monetary Policy, Fiscal Policy, Fiscal Solvency, Maximum Principle

Robust Monetary Policy

In formulating monetary policy, central banks must cope with substantial economic uncertainty. Economic uncertainty can arise from different sources: the state of the economy, the nature of economic relationships, and the magnitude and persistence of ongoing shocks. Robust control theory instructs decision makers to investigate the fragility of decision rules by conducting worst-case analyses. In this paper we show how state space methods and structural-form solution methods can be applied to robust control problems, thereby making it easier to analyze complex models. We illustrate the state space solution methods by applying them to an empirical New Keynesian business cycle model of the genre widely used to study monetary policy under rational expectations. A key finding from this exercise is that the strategically designed specification errors will tend to distort the Phillips curve in an effort to make inflation more persistent, and hence harder and more costly to stabilize. The optimal response to these distortions is for the central bank to become more activist in its response to shocks.robust control theory

A Robust Assessment of the Romanian Business Cycle

The paper provides potential output and output gap estimates for the Romanian economy in the period 1998 - 2008. Our approach consists in combining the structural method of the production function with several non-structural statistical detrending methods: Hodrick-Prescott, Kalman, band-pass, and wavelet transform filters. In this way, the obtained results benefit both from the economic foundations the production function method is relying on, as well as from the flexibility of the detrending techniques. The contribution of our analysis to the scarce literature dealing with the estimation of the cyclical position of the Romanian economy is twofold. First, we identify the contribution of the production factors to the potential output growth. Second, we aggregate the results obtained through filtering techniques in a consensus estimate ascribing to each method a weight inversely related to its revision stability. Our results suggest for the period 2000-2008 an average annual growth rate of the potential output equal to 5.8%, but on a descendant slope at the end of the analyzed period, due to the adverse developments in the macroeconomic context.potential GDP, output gap, NAIRU, business cycle

MODELING THE ECONOMIC GROWTH IN ROMANIA. THE ROLE OF HUMAN CAPITAL

We simulate possible growth paths assuming that the Romanian economy behaves according to the hypothesis of the Uzawa-Lucas model. By calibrating the model to the Romanian economy, we are able to forecast the evolution of the Romanian GDP and the proportion of human capital which will be used in the production of goods and services. Although the population growth rate is considered to be zero, the average real GDP growth rate is around 6% due to the human capital accumulation, which improves the quality of labor.endogenous economic growth, human capital, two-sector economy, path simulation, Uzawa-Lucas model

The Influence of Fiscal Policy on Economic Growth

In this paper we analyze the influence of several types of fiscal policies on the process of economic growth, namely on the rate of growth of consumption. We formulate and analyze two types of economic growth models. The first refers to the way in which a consumer-producer agent takes decisions when the elements concerning fiscal policy are exogenous. The second model is a global model including the economic agent, as well as the government. Both models are dynamic models with discrete variables on infinite horizon. The technique used is provided by the Maximum Principle. We perform a comparative analysis of the results obtained on the basis of the two models. What is surprising is the conclusion that the growth rate of consumption is larger for the second model. At the same time, we prove that if the ratio between private and public consumption is equal to the ratio between the elasticity coefficients of the utility function, then the rate of economic growth does not depend on the value of the tax rate.Fiscal Policy, Economic Growth, Social Capital, Maximum Principle

MODELING THE ECONOMIC GROWTH IN ROMANIA. THE INFLUENCE OF FISCAL REGIMES

Taking into consideration the importance of the sustainability of public finance, in the present study we calibrate and simulate a three-sector Greiner, Semmler and Gong (2004) model for the Romanian economy. The simulations were performed considering three fiscal regimes, defined according to the way the government expenditures were financed. By calibrating the model to the Romanian economy, we determine for each fiscal regime the optimal tax rate, that is the tax that maximizes the long-run growth rate, and we forecast the evolution of the real GDP.endogenous economic growth, fiscal regime, three-sector economy, path simulation, public capital, balanced growth path

Estimating The Cyclically Adjusted Budget Balance For The Romanian Economy. A Robust Approach

This paper provides estimates for the structural fiscal balance for the Romanian economy over the period 1998-2008. The calculation of the structural fiscal balance is useful, since it provides a clear picture of the fiscal stance of the economy and it is essential in the context of a medium term fiscal framework. In order to ensure the robustness of the estimation, we employed two methodologies for the computation of the elasticities of various categories of government revenues and expenditures with respect to the output gap. The two approaches issued similar results, the overall average budget sensitivity being equal to 0.285 and 0.290, respectively. The amplitude of the cyclical budget balance is around 1% of GDP. After constant improvement, the structural balance worsened in 2008, due mainly to the current crisis.fiscal policy, structural fiscal balance, cyclical budget balance, business cycle, tax elasticity