Monetary Theory and Policy

Transcription

1 October 16, 2015

2 1 Basics Problems of Macroeconomics Analysis of Policy Effects 2 Conduct of 3 Explaning Analyzing

3 Definitions Outline Basics Problems of Macroeconomics Analysis of Policy Effects Economics studies the efficient allocation of scarce resources. Macroeconomics is the study of economy as a whole. refers to the actions that governments take in the economic field (politics) analyses policies by developing economic models and using actual data (economics)

4 Problems of Macroeconomics Basics Problems of Macroeconomics Analysis of Policy Effects Why sustainable and high economic growth rates are important? Why saving is important? Why we need to reduce and stabilize inflation? Why should we keep current account deficit at low rates? How do we make financial crises less likely?

5 Basics Problems of Macroeconomics Analysis of Policy Effects What we need to analyse the economy I Making economic policy belongs to politics, explaining the workings of the economy belongs to economists. Like any science, economics has its own set of tools, terminology, data, and a way of thinking. Economic Theory It s a logical framework to explain a particular economic phenomenon.

6 Basics Problems of Macroeconomics Analysis of Policy Effects What we need to analyse the economy II Economic Model It s a simplified representation of an economic phenomenon. Economists use models to understand the world. Economic models illustrate the relationship among the variables. They are mostly based on mathematical terms. Models have two kinds of variables: - endogenous variables (explained by model) - exogenous variables (model takes as given) The goal of a model is to show how the exogenous variables affect endogenous variables.

7 Basics Problems of Macroeconomics Analysis of Policy Effects What we need to analyse the economy III Macroeconomic Data Data shows changes in economic variables and overall economy. Economists use data to estimate a macroeconomic model and get forecastings for the future policy implementation.

8 Design of Conduct of Economic policy is designed for short run. Short-run in the economy Output is determined by demand. Medium-run in the economy Output is determined by the level of technology, the capital stock and the labor force. Long-run in the economy Output is determined by education, research, savings and quality of governance.

9 Goals of Conduct of stabilize economic activity not economic growth reduce (actual GDP-potential GDP) stabilize inflation (price stability) stabilize unemployment reduce (actual level of unemployment-natural level of unemployment) exchange rate financial stability

10 Macroeconomic Policy Outline Conduct of There are two major types of macroeconomic policies are used to control aggregate demand. Fiscal Policy government spending and taxation Monetary Policy growth of money supply and interest rate

11 Monetary Policy Outline Conduct of Monetary Policy is the main policy. Because price stability is important. Price Stability reduce uncertainty better investment climate economic growth cannot change potential growth rate price stability output stability (Divine Coincidence) (Blanchard and Gali, 2005)

12 Fiscal Policy Outline Conduct of Fiscal policy support monetary policy by controlling government budget. budget deficit and inflation excess demand issued money

13 Monetary Policy Outline Conduct of Monetary policy s second goal is financial stability (after global financial crisis) Financial system is important for investments and economic growth. problems in the financial system raise sovereign debt people like risk-taking economic policy or policy makers should prevent risks

14 What is Explaning Analyzing...is short-run fluctuations in output and employment (or overall economy)

15 Characteristics of I Explaning Analyzing Overall economy Business cycles are fluctuations of aggregate economic activity, not a specific variable. But real GDP closely measures aggregate economic activity. Expansions and contractions There are expansions and contractions in the economy. recession: economic activity falls if the recession is severe, it s called depression. expansion: economic activity grows

16 Characteristics of II Explaning Analyzing Comovement Economic variables show comovement. They have regular and predictable patterns of behavior over the course of the business cycle. Recurrent but not periodic The business cycle is recurrent, but not periodic. Recurrent means the pattern of contraction trough expansion peak occurs again and again. Persistence Declines are followed by further declines; growth is followed by more growth.

17 Explaning Analyzing The Cyclical Behaviour of Economic Variables direction of economic variables Procyclical: in the same direction Countercyclical: in the opposite direction Acyclical: with no clear pattern timing of economic variable Leading: in advance Coincident: at the same time Lagging: after

18 Macroeconomic Variables Explaning Analyzing We use many types of data to measure performance of the economy. Three macroeconomic variables are especially important : Gross Domestic Product measures the total income of everyone in the economy Unemployment Rate measures fraction of the labor for that is out of work Inflation Rate measures how fast prices are rising

19 Gross Domestic Product I Explaning Analyzing

20 Gross Domestic Product II Explaning Analyzing

21 Inflation I Outline Explaning Analyzing

22 Inflation II Outline Explaning Analyzing

23 Unemployment Outline Explaning Analyzing

24 Analyzing Explaning Analyzing The key difference between the short-run and the long-run is the behaviour of prices. in the long-run, prices are flexible in the short-run, prices are sticky Because of this difference, policies have different effects effects over time horizons. A model of economic fluctuations must take into account this short-run price stickiness.

25 Price Stickiness I Outline Explaning Analyzing Market Structure Perfect Competition - In classical models, economic actors (buyers and sellers) are price takers. - They decide how much to buy or sell. - Goods and services are standardized (homogenous). Monopolistic Competition - Most goods and services are not standardized. - Firms have some market (monopoly) power. - There is a substantial competition the market. Firms set prices.

26 Price Stickiness II Outline Explaning Analyzing Sources of Price Stickiness Menu Costs - Changing prices is a complex process that involves many hidden costs. - Changing prices cause that customers might switch to different store. Staggered Price Setting - Competitors adjust prices at different intervals.

27 Theoritical Backround Outline Explaning Analyzing Classical Theory prices are flexible output depends on economy s supply supply depends on capital, labor, technology Keynesian Theory prices are sticky output depends on economy s demand demand depends on consumers confidence, firms expectations, monetary and fiscal policy

28 AD-AS Model: A Brief Explaning Analyzing

29 AD-AS Model Outline Explaning Analyzing The model allows us to study how the aggregate price level and the quantity of aggregate output are determined in the short-run. We can compare how economy behaves differently in the short-run and in the long-run. The model is a sophisticated model that incorporates the interactions among many markets.

30 AD: Aggregate Demand Explaning Analyzing

31 Derivation of AD Outline Explaning Analyzing We use the quantity theory of money to derive AD curve. MV=PY

32 AS: Aggregate Supply I Outline Explaning Analyzing - Goods and services have flexible prices in the long-run and sticky prices in the short-run - The aggregate supply relationship depends on time horizon - We use two different AS curves the long-run the vertical AS curve flexible prices output depend on supply the short-run the horizontal AS curve sticky prices output depends on demand

33 AS: Aggregate Supply II Explaning Analyzing the long-run the short-run

34 AS: Aggregate Supply III Explaning Analyzing

35 Explaning Analyzing An Example: Modelling a recession in AD-AS