Working Paper: CEPR ID: DP8050
Authors: Alexis Anagnostopoulos; Chryssi Giannitsarou
Abstract: In this paper, we analyze the importance of the frequency of decision making for macroeconomic dynamics. We explain how the frequency of decision making (period length) and the unit of time measurement (calibration frequency) differ and study the implications of this difference for macroeconomic modelling. We construct a generic dynamic general equilibrium model that nests a wide range of macroeconomic models and which leaves the period length as an undetermined parameter. We provide a series of examples (variations of the Cass-Koopmans and the New Keynesian models) that fit into this framework and use these to do comparative dynamics with respect to the period length. In particular, we analyze local stability and how this is affected by changes in the period length. We find that in models with endogenous capital accumulation, as the period gets longer, indeterminacy occurs less often. Moreover, as economic agents become less patient and as capital depreciates more, indeterminacy also occurs less often. We also show that, in the case of the New Keynesian model, standard continuous and discrete time versions have entirely different local stability properties due to a discontinuity at zero period length.
Keywords: Depreciation; Discounting; Local Indeterminacy; Macroeconomic Dynamics; Period Length
JEL Codes: C62; E22; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decision-making frequency (D91) | macroeconomic dynamics (E19) |
| period length (C41) | frequency of indeterminacy (C62) |
| time preference (D15) | frequency of indeterminacy (C62) |
| capital depreciation rate (G31) | frequency of indeterminacy (C62) |
| period length (C41) | local stability properties (C62) |
| period length (C41) | current decisions (D70) |
| frequency of indeterminacy (C62) | expectations (D84) |
| period length (C41) | self-fulfilling expectations (D84) |