EC4100: Macroeconomic Policies in the Short Run

Transcription

1 EC4100: Macroeconomic Policies in the Short Run Philip R. Lane, TCD February 2010 Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

2 Introduction Integrated model of short-run macroeconomic uctuations: trade balance; exchange rate output; Textbook version: many compromises but easy to apply ( back of the envelope ) IMF, ECB, FED: more elaborate models but many similar predictions Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

3 Applications Analysis of shocks Analysis of monetary and scal policies Alternative exchange rate regimes Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

4 IS-LM-FX Model Version of Mundell-Fleming classic model Price stickiness: P, P and π e = 0. Ȳ xed, ī xed G, T policy choices NFIA = NUT = 0 =) Y = Q (GNDI = GDP) and TB = CA Level of demand determines output Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

5 Demand Components C = C (Y T ) [MPC] I = I (i) G = Ḡ [Fiscal balance: T Ḡ] TB = EX IM = TB(E P / P, Y T, Y T ) Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

6 The Trade Balance TB = TB(E P / P, Y T, Y T ) Expenditure Switching Relative Income Levels MPC = MPC H + MPC F Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

7 Figure 18.1 The Consumption Function

8 Figure 18.2 The Investment Function

9 Figure 18.3 The Trade Balance and the Real Exchange Rate

10 Marshall-Lerner Condition I Does real depreciation improve value of trade balance? Let initial position be TB = 0 =) EX = qim v TB measured in units of the home good EX = EXv [exports in same units as GDP with relative price of 1] IM = q IMv = q EX In general, TB = EX v qim v Response of TB wrt q TB q = EX v q q IM v q IM v Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

11 Marshall-Lerner Condition II In neighbourhood of TB = 0, can re-write as η EX = EX v q ML condition q EX v TB q TB q TB q q EX = η EX η IM 1 > 0; η IM = IM v q q IM v < 0 > 0 i η EX η IM > 1 > 0 i η EX + abs(η IM ) > 1 Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

12 J Curve Initially, nominal depreciation may reduce value of TB (J Curve dynamics) Nominal depreciation may not fully alter relative price of imports in short run export and import prices xed on world markets export and import prices both sticky in domestic currency market share concerns for importers large nontraded component in retail import prices Trade volumes respond slowly to real depreciation Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

13 Figure 18.4 The Real Exchange Rate and the Trade Balance: United States,

14 Table 18.1 Trade Dollarization

15 Figure 18.5 The J Curve

16 Goods Market Equilibrium Y = D = C (Y T ) + I (i) + Ḡ + TB(q, Y T, Y T ) Driving forces: Shocks to C (), I (), TB() Shocks to i, Ḡ, T,q (Sticky prices q driven by E) Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

17 Figure 18.6 Exogenous Shocks to Consumption, Investment, and the Trade Balance

18 Figure 18.6 Exogenous Shocks to Consumption, Investment, and the Trade Balance

19 Figure 18.6 Exogenous Shocks to Consumption, Investment, and the Trade Balance

20 Figure 18.7 The Goods Market Equilibrium and the Keynesian Cross

21 Figure 18.7 Shifts in Demand

22 Open-Economy IS curve Equilibrium in both goods market and FX market (i, Y ) space i operates through FX market in addition to I (i). IS = IS(G, T, i, E e, P, P,.) Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

23 Figure 18.8 Deriving the IS Curve

24 Figure 18.9 Exogenous Shifts in Demand Cause the IS Curve to Shift

25 LM curve Equilibrium in domestic money market (i, Y ) space i operates through FX market in addition to I (i). LM = LM(M/ P,.) Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

26 Figure Deriving the LM Curve

27 Figure Change in the Money Supply Shifts the LM Curve

28 Policy Analysis in IS-LM-FX Model Short-run impact of policies temporary policies (E e xed) Monetary-Float Monetary-Fix Fiscal-Float Fiscal-Fix Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

29 Figure Equilibrium in the IS-LM-FX Model

30 Figure Monetary Policy under Floating Exchange Rates

31 Figure Monetary Policy under Fixed Exchange Rates

32 Figure Fiscal Policy under Floating Exchange Rates

33 Figure Fiscal Policy under Fixed Exchange Rates

34 Figure U.S. Monetary and Fiscal Policy Shocks circa 1980

35 Figure U.S. Monetary and Fiscal Policy,

36 Stabilisation Policies Policy responses to shocks Timing issues Most e ective in case of persistent, large shocks Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15

37 Figure Stabilization Policy under Floating Exchange Rates

38 Figure Demand Shocks Down Under

39 Policy Constraints Exchange rate regime Fiscal space : funding risk Foreign-currency debt Incomplete information and the inside lag Outside lag Long-horizon plans J curve Pegged currency blocs Philip R. Lane, TCD () EC4100: Macroeconomic Policies in the Short Run February / 15