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A question from my macro mid-term
"Imagine that we live in the world of Malthus, where real wages hover at subsistence and boosts in living standards occasion population growth which then push wages back toward subsistence. Furthermore if some of this population growth comes through improved sanitation and fewer deaths, it can happen in the short run, not just the long run. How might this change real business cycle models? What are the implication of a Malthusian model for interest rates."
MR readers are, of course, free to leave their answers in the comments.
Posted by Tyler Cowen on October 29, 2006 at 05:55 AM in Economics | Permalink
Comments
In the world of Malthus, Economics was not thought a fit subject for study in Universities, so there is no need to answer, is there Prof?
Posted by: dearieme at Oct 29, 2006 7:19:29 AM
^
^
Is that a disgruntled student from your past exam, professor?
Posted by: sb at Oct 29, 2006 9:30:23 AM
Well, I am just an ignorant hillbilly, but….
I would say that since the world that you are describing is a world where economic growth rates can not exceeded population growth; then real interest rates must necessarily correlate with the growth in human population. The real interest rate would be slightly higher than the rate of human population growth because deprecation would still create a slight demand for capital even if human population growth was static.
As for what this would do to theories of real business cycles; that would obviously depend on your theories of population growth. For example, if we were to argue that human population growth cycles were like rabbit growth cycles we would have a cycle that had high real interest rates at the beginning of the cycle with negative real rates towards the end of the cycle.
The logic behind this is that economic growth rates in a Malthusian world have a diminishing rate of return. Thus the demand for consumables relative to investing would be increasing. This would cause real interest rates to go down. At some time during the growth cycle the demand for consumables would be so great that people would start consuming their capital stock instead of replenishing it. That would cause a collapse that would bring us back to the start of the cycle.
Posted by: The Chieftain of Seir at Oct 29, 2006 9:45:37 AM
Reduction in mortality due to improved sanitation is likely to affect the two ends of the demographic bell curve more than the middle. As a result, with similar number of workers, there will be more mouths to feed in the “short” run (a decade or two). Productivity of an “effective” labor will go down. In the long run, however, productivity will pick up as the surviving infants grow up to enter the work force. This suggests the need for modification of the RBC model to incorporate demo parameters.
As for the interest rate, there are two ways to look at it. The intuitive way is that money today would worth more because there are more mouths to feed. The interest rate must therefore go up for a decade or two. The mathematical way would be to calculate the derivative of wage over time which suggests the interest rate indeed goes up with growth in population. Since the short-run population growth faster than the long run growth, the short run interest rate should also be higher.
Posted by: Yan Li at Oct 29, 2006 10:23:02 AM
The scenario you outline resembles in certain aspects several nations of the middle east. I therefore believe the business cycles and interest rates would, uh, er, . . . resemble those of the aforementioned (but unspecified) middle eastern nations, minus oil output and opportunities for emmigration. So I would, uh, study the business cycles and interest rates of these countries.
Interesting question, professor. Can I stop typing now.
Posted by: Fred at Oct 29, 2006 11:04:10 AM
Seems to me that a Malthusian environment implies no technology change and constant worker productivity. So no technology shocks. In the models I've seen this means that shocks would have to come from the government.
Posted by: eamon at Oct 29, 2006 10:21:24 PM
If everyone worked for subsistence wages...why would their even be an interest rate?
What would people be borrowing?
Death?
Posted by: monkyboy at Oct 30, 2006 12:47:23 AM
It's been a while, but this sounds much more like Ricardo's Iron Law of Wages than Malthus...
Posted by: Bergamot at Oct 30, 2006 1:35:27 AM
Just follow the intuition: one with relatively stable wage will take more risk to invest more. So the richer the supply of the captial, the lower the interest rate perhaps. However, the Malthusian model tells us that the more abundant the human resource, the higher interest rate for the capital.( I am not sure if i understand the model!)So it is hard to say whether there must be an inflation.
Posted by: beginner.lesson1 at Oct 30, 2006 5:32:18 AM
Let me try to remember my macro...
Think of a 2 period model consisting of today and tomorrow.
If consumers today observe an increase in living standards, they should anticipate tomorrows increase in population (and labor supply) which will lead to lower wages. Therefore consumers should work more today (at a higher wage) and less tomorrow.
The increase in labor supply today should push up the interest rate today, as the marginal product of capital increases with labor supply. Because consumers are saving more today, there will be more capital tomorrow, which will tend to push down the interest rate tomorrow. As labor supply tomorrow will increase because of population growth, the net effect on the interest rate tomorrow is unclear. If I had to guess I'd say that the effect of the labor supply increase would dominate the increase in the capital stock and we'd get a higher interest rate tomorrow.
Tyler I don't really see how this "changes" the RBC model, except that you introduced exogenous population shocks as the disturbance mechanism instead of exogenous technology shocks.
Posted by: Brian at Oct 30, 2006 11:27:42 AM
Let me try to remember my macro...
Think of a 2 period model consisting of today and tomorrow.
If consumers today observe an increase in living standards, they should anticipate tomorrows increase in population (and labor supply) which will lead to lower wages. Therefore consumers should work more today (at a higher wage) and less tomorrow.
The increase in labor supply today should push up the interest rate today, as the marginal product of capital increases with labor supply. Because consumers are saving more today, there will be more capital tomorrow, which will tend to push down the interest rate tomorrow. As labor supply tomorrow will increase because of population growth, the net effect on the interest rate tomorrow is unclear. If I had to guess I'd say that the effect of the labor supply increase would dominate the increase in the capital stock and we'd get a higher interest rate tomorrow.
Tyler I don't really see how this "changes" the RBC model, except that you introduced exogenous population shocks as the disturbance mechanism instead of exogenous technology shocks.
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