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Lecture II: Medium run evolutions
Blanchard, “the medium run”
• Develops an adjustment cost model of labor demand and labor supply
• Looks at the dynamic response of a number of variables to labor supply and labor demand shifts
The model
The firm’s optimization problem
Functional forms
Figure 4:
Figure 5
Figure 6
Figure 10
Figure 11
Figure 12
Caballero-Hammour, “Jobless growth”
• Looks at the dynamic response of K/L to wage pushes and more generally “appropriability”
• Uses a putty-clay model instead of Blanchard’s adjustment cost model
The model
The model (continued)
The model (continued)
The model (end)
What is going on?
K
L
Old vintage(Labour intensive)
New vintage(Capital intensive)
w
r
New
Old
ROR A
B
C
D
Initial wage push
Figure 4.2
Figure 4.3