ch8A-Two-Period-Model(中级宏观经济学，香港中文大学).ppt

Chapter 8 A Two-Period Model: Consumption-Savings Decision Ricardian Equivalence Two-Period Model of the Economy In Chapter 8, we will focus on the consumers’ and government’s behavior. Firms’ behavior is reintroduced in Chapter 9. A consumer’s consumption-savings decision involves a trade-off between current and future consumption. By saving, a consumer gives up consumption in exchange for assets in the present, in order to consume more in the future. The government’s decision concerning the financing of government expenditure, involves a trade-off between current and future taxes. Consumers Assume that there are m consumers ( m is a large number ). Each consumer lives for two periods, current and future period. Each consumer receive exogenous income in both periods. Consumer can put aside the work-leisure decision. Incomes can differ across consumers. Zero wealth endowment in the current period. Each consumer pays lump-sum taxes in both periods. Notations: y and t denote real income and tax in 1st period. y’ and t’ denote real income and tax in 2nd period. Current period budget constraint: c + s = y - t. Consumers’ after-tax income can either be saved ( s ) or consumed ( c ). Saving 0 ( 0 ) ? Buys ( sells ) a bond with part of his/her income ? The consumer is a lender ( borrower ) on the credit market. What is a bond ? A bond issued ( by the government ) in the current period is a promise to pay a certain amount, say 1 + r units, of consumption good in the future period. ? 1 unit of c can be exchanged for 1 + r units of c’ in the credit market. r is thus the real interest rate on each bond. Remark: we assume that a consumer can lend and borrow at the same real interest rate, i.e. the credit market is perfect. Future period budget constraint: c’ = y’ - t’ + ( 1 + r )s. Apart from the after-tax income, the consumer receives the interest and principal on savings. Since there are only two periods, there is no incentive for any savings in the