Source: All CPI numbers are from The Bureau of Labor Statistics

Transcription

1 Inflation, deflation, and interest rates... and the business cycle Source: All CPI numbers are from The Bureau of Labor Statistics 2018 Gary R. Evans. This slide set by Gary R. Evans is licensed under a Creative Commons Attribution- NonCommercial-ShareAlike 4.0 International License.

2 Inflation: why a problem? Reallocates income and wealth unfairly from lender to borrower from salaried from elderly (unless prepared) to speculators Injects tremendous uncertainty curbs investment

3 Inflation: (continued) Seriously threatens financial markets especially stocks Invites a policy response the modern FRS crunch As goes inflation, i so go interest rates

4 Deflation: why a problem? Threatens financial institutions and lenders nominal amortized payment obligations i are harder to meet, forcing default interest trates are low or negative forcing savers towards speculation Compounding affect... buyers postpone purchases Injects tremendous uncertainty curbs investment

5 Average: 3.78% 16 CPI Inflation Rate: Annual % change Acceptable - desired level (about 2.0%) 14 Double-digit hyperinflation Green lines: BC troughs CPI for urban consumers, U.S. city average, all items, NSA. Source: Bureau of Labor Statistics

6 2017: Still a low-inflation era... 15% 10% 5% 0% -5% -10% -15% -20% Right at the worst of times but also a substantial and temporary decline in oil prices. This is monthly CPI calculated as annualized continuous growth rates: ln(p t / P t-1 )*12-25% Annualized monthly CPI 12 month moving average

7 CPI and Mortgage and 10-year Treasury Bond Rates: What story is found here? As goes inflation, so will go mortgage rates and other key rates. Source for interest rates: Federal Reserve Board data download program, H-15 series

8 Domestic Non-financial Debt / National Income This is the total net indebtedness of all parties in the U.S. economy (non-financial eliminates double counting) divided by National Income. This is a national proxy for our debt divided by our capacity to pay it. Stability The 80s discover credit Millennium craziness This is at the root of why we are in trouble Source (debt): Federal Reserve Flow of Funds Accounts, Z1 statistical release

9 Economic Models... an introduction 2018 Gary R. Evans. This slide set by Gary R. Evans is licensed under a Creative Commons Attribution- NonCommercial-ShareAlike 4.0 International License.

10 Classes of economic models Visual Models Mathematical Models Empirical Models Simulation i Models

11 Example of a visual model: The Elementary Supply and Demand Model with Inflationary Expectations Price Supply 1 P 1 Demand 1 Q 1 Quantity

12 Example of a math model: The Elementary Supply and Demand Model with Inflationary Expectations () 1 S a bp ( 2) ( 3 ) ( 4 ) D c dp eie S D Q P 0 0 ( c eie a) ( b d) (5) Q a bp 0 0

13 Example of an empirical model:... take the math model and estimate the coefficient values statistically ( 1 ) S a bp ( 2 ) D c dp eie ( 3 ) S D Q 0

14 Example of a simulation model:

15 A comparative statics model... Price P 2 P 1 a Supply 1 b..due to an increase in inflationary expectations Demand 1 Q 1 Q 2 Quantity

16 Ad dynamic model... () 1 Y C I t t t ( ) 2 C a by t t 1 ( 3 ) I v ( Y Y ) t t 1 t 2

17 Variables that effect supply and demand Factors that Effect Demand Factors that Effect Supply 1. Price (-) 1. Price (+) 2. Income (+) 2. Labor costs (-) 3. Wealth (+) 3. Resource costs (-) 4. Population (+) 4. Advertising costs (-) 5. Advertising (+) 6. Substitute prices (+) (+) Shift curve right 7. Inflationary Expectations (+) (-) Shift curve left

18 The math equivalent... ( 1 ) D f ( P, I, W, N, A, S, E, X ) ( 2) S g( P, L, R, A, Y) () 3 D0 S0 where D W S 0 and 0 L

19 The tendency toward equilibrium... Price Inventory buildup $600 b a S $400 c D 8 (sold) (produced) Quantity

20 Know the following also... Expectations-enhanced enhanced models Adaptive expectations Rational expectations The primary limitations of models The model as an image of economic activity it The examples