1. THE KEYNESIAN MODEL Lecture 4: Introduction to Keynesian Model:
Derivation; National Saving Identity.
Lecture 5: Multipliers for spending & exports;
the transfer problem.
Lecture 6: Large-country model; International transmission under fixed vs. floating exchange rates
Lecture 7: Adjustment of a CA deficit via expenditure-reducing vs. expenditure-switching policies
Lecture 8: Monetary factors

2. Imports & exports depend on income:
assuming E & Y* fixed, for now. Y TB + -
…and rises in contractions
where slope = -m ≡
- marginal propensity
to import
TB falls in expansions…
as does consumption: Keynesian consumption function
ITF220 - Prof. J. Frankel, Harvard University

3. Trade balance rises in recessions,
The US trade balance improved sharply in the recession of
falls in expansions
$ MILLIONS PER QUARTER
Current
Account
Goods & Services
ITF220 - Prof. J. Frankel, Harvard University

4. Determination of equilibrium income in open-economy Keynesian model
Now solve:
where
and
ITF220 - Prof. J. Frankel, Harvard University

5. ITF220 - Prof. J. Frankel, Harvard University
Derivation of National Saving Identity
Income ≡ Output (assuming no transfers)
Y ≡ GDP
/ /
C + S + T ≡ C + I + G + X -M
S + (T-G) ≡ I + X – M
National
Saving
Identity
NS ≡ S + BS ≡ I + TB
ITF220 - Prof. J. Frankel, Harvard University

6. ITF220 - Prof. J. Frankel, Harvard University
US National Saving, Investment, & Current Account as Shares of GDP,
Trend: Gap widened,
as NS fell relative to I
ITF220 - Prof. J. Frankel, Harvard University

7. ITF220 - Prof. J. Frankel, Harvard University
Keynesian Consumption Function:
or, expressed as a saving function:
where s ≡ 1 – c . }
ITF220 - Prof. J. Frankel, Harvard University

8. ITF220 - Prof. J. Frankel, Harvard University
Closed economy: NS – I = 0 Fiscal Expansion
1 < Closed-economy multiplier 1/s < ∞
ITF220 - Prof. J. Frankel, Harvard University

9. ITF220 - Prof. J. Frankel, Harvard University
Open economy: NS – I = TB = X – M
Imports: for simplicity
Exports: for simplicity.
ITF220 - Prof. J. Frankel, Harvard University

10. ITF220 - Prof. J. Frankel, Harvard University
Open economy
Fiscal Expansion
slope = s
ITF220 - Prof. J. Frankel, Harvard University

11. ITF220 - Prof. J. Frankel, Harvard University
End of Lecture 4:
Introduction to the Keynesian Model
ITF220 - Prof. J. Frankel, Harvard University

12. ITF220 - Prof. J. Frankel, Harvard University
Appendix Puzzle: Why did global trade collapse in the global recession?
(more than usual)
2009
Bussière, Callegari, Ghironi, Sestieri & Yamano, 2013, "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of "
ITF220 - Prof. J. Frankel, Harvard University

13. ITF220 - Prof. J. Frankel, Harvard University
One answer: There is a marginal propensity to import out of investment, greater than the marginal propensity to import by consumers. And investment fell much more than consumption in
Bussière, Callegari, Ghironi, Sestieri & Yamano, 2013, "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of "
ITF220 - Prof. J. Frankel, Harvard University