Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Inflation and
Growth
Money and Prices
• The quantity theory of money
• The equation of exchange: MV = PY
– M money supply
– V velocity of circulation
– P price level (number of times greater
than in base year)
– Y real value of output at base-year prices
– MV = PQ
• The link between money and prices
– quantity theory holds if V and Y are determined
independently of M
Money and Prices
• Assumptions about the velocity of
circulation
– the short run
• uncertain relationship between money and
prices
• the monetary transmission mechanism
– the money–interest rate link
– the interest rate–spending link
AS
Price level
National output
Different aggregate supply curves
AS
Price level
P1
AD1
O Y1
National output
Different aggregate supply curves
AS
Price level
P2
P1
AD2
AD1
O Y1 Y2
National output
Short-run response of a profit-maximising
firm to a rise in demand
£
MC
P1
AR1
Q1 Q
MR1
Short-run response of a profit-maximising
firm to a rise in demand
£
MC
P1
AR2
AR1
Q1 MR2 Q
MR1
Short-run response of a profit-maximising
firm to a rise in demand
£
MC
P2
P1
AR2
AR1
Q1 Q2 MR2 Q
MR1
Money and Prices
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
O Y
National output
Different aggregate supply curves
AS
Price level
P1
AD1
O Y
National output
Different aggregate supply curves
AS
Price level
P2
P1
AD2
AD1
O Y
National output
Money and Prices
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
SRAS1
(expected price level = P1)
Price level
P1
a
AD1
O Q1
National output
The long-run aggregate supply curve
when firms are interdependent
SRAS2
(expected price level = P3 )
SRAS1
(expected price level = P1)
c
Price level
P3
P2 b
P1
a
AD2
AD1
O Q1 Q2
National output
The long-run aggregate supply curve
when firms are interdependent
LRAS
SRAS2
(expected price level = P3 )
SRAS1
(expected price level = P1)
c
Price level
P3
P2 b
P1
a
AD2
AD1
O Qn Q2
National output
Money and Prices
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
AS1(shortrun)
Price level
AD1
National output
Effect of investment on the long-run AS curve
AS1(shortrun)
AS2(shortrun)
b AS (longrun)
Price level
d
a
AD2
AD1
National output
Inflation and Unemployment:
Introducing Expectations
• Expectations augmented Phillips curve
– adaptive expectations
. A Phillips curve
P (%)
. b
P2
. a
P1
O U2 U1 U (%)
Inflation and Unemployment:
Introducing Expectations
• Expectations augmented Phillips curve
– adaptive expectations
• The accelerationist theory
Inflation and Unemployment:
Introducing Expectations
• Expectations augmented Phillips curve
– adaptive expectations
• The accelerationist theory
– accelerating inflation
Inflation and Unemployment:
Introducing Expectations
• Expectations augmented Phillips curve
– adaptive expectations
• The accelerationist theory
– accelerating inflation
• when unemployment is kept below the ‘natural’
level
.
The accelerationist theory of inflation
P (%)
20
16
12
8
b
4 a
6 8 . U (%)
I (Pe = 0)
.
The accelerationist theory of inflation
P (%)
20
f
16
12
d
.
8 IV (Pe = 12%)
b c .
III (Pe = 8%)
.
4 a II (Pe = 4%)
6 8 . U (%)
I (Pe = 0)
Inflation and Unemployment:
Introducing Expectations
• Expectations augmented Phillips curve
– adaptive expectations
• The accelerationist theory
– accelerating inflation
• when unemployment is kept below the ‘natural’
level
– the long-run Phillips curve
.
P (%) The long-run Phillips curve
20
16
12
6 8 U (%)
U
Inflation and Unemployment:
Introducing Expectations
• Expectations augmented Phillips curve
– adaptive expectations
• The accelerationist theory
– accelerating inflation
• when unemployment is kept below the ‘natural’
level
– the long-run Phillips curve
– effects of deflationary policies
.
The effects of deflation
P (%)
24
22
J
20 k
18
.
16 X (Pe = 20%)
14
12
10
8
6
4
8 1 U (%)
2
3
.
The effects of deflation
P (%)
24
22
J
20 k
18 l
.
16 m X (Pe = 20%)
.
14 XI (Pe = 18%)
.
12 XII (Pe = 16%)
10
8
6
4
8 1 U (%)
2
3
.
The effects of deflation
P (%)
24
22
J
20 k
18 l
16 m
14
12
10
8
6
a
4
8 1 U (%)
2
3
Inflation and Unemployment:
Introducing Expectations
• Expectations augmented Phillips curve
– adaptive expectations
• The accelerationist theory
– accelerating inflation
• when unemployment is kept below the ‘natural’
level
– the long-run Phillips curve
– effects of deflationary policies
• Phillips loops
. Clockwise Phillips loops
P (%)
20
b
a
Year 2
Un U (%)
Year 0, 1
. Clockwise Phillips loops
P (%)
20
f
e
Year 5
c
Year 4
Year 3
b
a
Year 2
Un U (%)
Year 0, 1
. Clockwise Phillips loops
P (%)
20
f
e
g
d
h Year 5, 8
c
Year 4, 7
i
Year 3, 8
b J
a Year 2, 9
Un U (%)
Year 0, 1, 10
Inflation and Unemployment:
Introducing Expectations
• Expectations augmented Phillips curve
– adaptive expectations
• The accelerationist theory
– accelerating inflation
• when unemployment is kept below the ‘natural’
level
– the long-run Phillips curve
– effects of deflationary policies
• Phillips loops
• Policy implications
Inflation and Unemployment: New
Classical Views
• Assumption of flexible wages and prices
• Rational expectations
– meaning of rational expectations
– imperfect information
– implications for AS and the Phillips curve
– policy implications
• Real business cycles
– fluctuations in aggregate supply
– causes of changes in aggregate supply
– policy implications
Inflation and Unemployment:
Keynesian Views
• Changes in equilibrium unemployment
– structural unemployment
– hysteresis
• The persistence of demand-deficient
unemployment
– payment of efficiency wages
– insider power
• Incorporation of expectations
– expansion of aggregate demand
– contraction of aggregate demand
• Keynesian criticism of non-intervention
Common ground between economists?
Source: The Use of Explicit Targets for Monetary Policy: Practical Experiences
of 91 economies in the 1990s, (Bank of England, August 1999)
Who sets explicit targets and monitoring ranges for
the exchange rate, money and inflation
Source: The Use of Explicit Targets for Monetary Policy: Practical Experiences
of 91 economies in the 1990s, (Bank of England, August 1999)
Who sets explicit targets and monitoring ranges for
the exchange rate, money and inflation
Source: The Use of Explicit Targets for Monetary Policy: Practical Experiences
of 91 economies in the 1990s, (Bank of England, August 1999)
Who sets explicit targets and monitoring ranges for
the exchange rate, money and inflation
Source: The Use of Explicit Targets for Monetary Policy: Practical Experiences
of 91 economies in the 1990s, (Bank of England, August 1999)
Demand-side Policy
• Case against rules
– can cause severe fluctuations in interest
rates and can cause greater instability
– which rule to choose?
– rules may conflict
– rules may become unsuitable
• Case for discretion
– fine tuning can be improved by better
forecasting and quick-acting policies
– allows governments to respond to changing
circumstances
Demand-side Policy
• Demand-side policy in the UK
– increasingly rules-based
– fiscal policy
• 'golden rule'
• but some flexibility
– monetary policy
• target of 2% inflation set by government
• Monetary Policy Committee adjusts interest rates
to meet this 2% target
• benefits of transparency
• benefits for expectations
Long-term Economic Growth
120
110
100
Real GDP (1995 = 100)
90
80
70
60
50
40
UK GDP at market prices (1995=100)
120
110
100
Real GDP (1995 = 100)
90
80
70
60
50
40
Long-term Economic Growth
Output (Y)
f
Y1
a Depreciation (D)
Y0
Investment (I)
g
I0
b
D0 c
O K0 K1
Capital stock (K)
Long-term Economic Growth
m Y
Y2
f
Y1
n I2
h
I1
g
K1 K2
Capital stock (K)
Long-term Economic Growth
• Technological progress
– effect on steady-state output
Output (Y), Investment (I), Depreciation (D) Effect of a technological advance
p Y2
Y2
Y1
f
Y1
D
n I2
h
I1
g
K1 K2
Capital stock (K)
Long-term Economic Growth
• Technological progress
– effect on steady-state output
– endogenous growth theory
Long-term Economic Growth
– to reduce unemployment
– to reduce inflation
– tax cuts
Supply-side Policy
– tax cuts
• effects on labour supply and employment
Supply-side Policy
– tax cuts
• effects on labour supply and employment
• importance of incentives
Supply-side Policy
– tax cuts
• effects on labour supply and employment
• importance of incentives
• effects on imports
Supply-side Policy
– tax cuts
• effects on labour supply and employment
• importance of incentives
• effects on imports
Source: Budget 2003, Economic and Fiscal Strategy Report (HM Treasury, 2003)
Productivity in selected countries, 2001 (UK = 100)
Source: Budget 2003, Economic and Fiscal Strategy Report (HM Treasury, 2003)
Productivity in selected countries, 2001 (UK = 100)
Source: Budget 2003, Economic and Fiscal Strategy Report (HM Treasury, 2003)
Productivity in selected countries, 2001 (UK = 100)
Source: Budget 2003, Economic and Fiscal Strategy Report (HM Treasury, 2003)
Supply-side Policy