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Another metaphor:
(I'm thinking out loud)
Buyers & sellers face transport costs of travelling to & from markets.
Transport costs temporarily increase (for some goods more than others, some markets close).
What happens to r*?
Not obvious (to me). 1/
(I'm thinking out loud)
Buyers & sellers face transport costs of travelling to & from markets.
Transport costs temporarily increase (for some goods more than others, some markets close).
What happens to r*?
Not obvious (to me). 1/
Transport costs create a wedge (like a tax wedge) between buyer's price & seller's price, with the observed market price somewhere in between.
There's:
buyer's r* (deflated by buyer's price)
seller's r* (deflated by seller's price)
market r* (deflated by market price) 2/
There's:
buyer's r* (deflated by buyer's price)
seller's r* (deflated by seller's price)
market r* (deflated by market price) 2/
Plus, there's a different r* for each good, if relative prices are expected to change as transport costs rise & then fall again (they will).
So lotsa fun & games with buyers' and sellers' Euler equations for each good. 3/
So lotsa fun & games with buyers' and sellers' Euler equations for each good. 3/
The 2-sector model is like a special case of this "model", where transport costs are prohibitive for half the goods, and zero for the other half.
With only 2 goods (one for each sector) there's only one r* (r* for the unobtainium good is irrelevant). 4/
With only 2 goods (one for each sector) there's only one r* (r* for the unobtainium good is irrelevant). 4/
Perhaps it's best to ask:
Under what conditions would market r* stay the same (when transport costs temporarily rise)?
I think that would take a lot of symmetry, between buyers & sellers. 5/
Under what conditions would market r* stay the same (when transport costs temporarily rise)?
I think that would take a lot of symmetry, between buyers & sellers. 5/
Relative to perfect symmetry (market r* constant):
1. If transport costs rise for buyers more than for sellers, market r* falls.
2. If intertemporal elasticity is higher for buyers than sellers, market r* falls.
(Just like tax incidence theory!)
*Think* that's right. 6/
1. If transport costs rise for buyers more than for sellers, market r* falls.
2. If intertemporal elasticity is higher for buyers than sellers, market r* falls.
(Just like tax incidence theory!)
*Think* that's right. 6/
1. I have weak priors on whether coronavirus raises "transport costs/tax" (metaphor) more for buyers or sellers.
2. My prior is that intertemporal elasticity is higher for buyers than for sellers (most goods & services, short run).
So r* falls (AD falls more than AS) /end
2. My prior is that intertemporal elasticity is higher for buyers than for sellers (most goods & services, short run).
So r* falls (AD falls more than AS) /end
