Demystifying Monetary and Fiscal Policy

Transcription

1 Farrokh K. Langdana Macroeconomic Policy Demystifying Monetary and Fiscal Policy Third Edition Foreword by W. Michael Cox ö Springer

2 Contents 1 Introduction and Overview of the Third Edition Chapter Overview What's New in This Third Edition 5 2 National Income Accounts Paradigm Shilits: An Introduction Some Fundamental Definitions Inflation GDP Deflator Consumer Price Index (CPI) The PCE Deflator: The Index Used by the Fed Discussion Questions 20 3 Budget Deficite, Trade Deficite, and Global Capital Flows: The National Savings Identity The National Savings Identity (NSI) Two Crucial Assumptions Underlying the NSI Linking the Twin Deflcits Possible Negative Aspects of Bond-Financed Deflcits Two Cases of the NSI: The United States and China US-Type NSI China-Type NSI Factors Influencing Global Capital Flows Hot Capital: The Bane of Emerging Economies Factors Influencing Global Capital Flows: The Cave Theory Discussion Questions 47 4 Aggregate Demand: Setting the Stage for Demand-Side Stabilization Demand-Side Stabilization Business Cycles 59 xvii

3 xviii Contents 4.3 Variables Underlying the Aggregate Demand: Introducing the Goods Market & Analyzing the Components of Aggregate Demand A Preliminary Money Market and an Introduction to Quantitative Easing (QE) Deriving the Aggregate Demand Discussion Questions 76 5 Demand-Side Stabilization: Overheating, Hard Landing, and SAP Bubbles Shifting the AD: Changing Government Spending The Mechanism of the Multiplier Effect Shifting the AD: Changing Monetary Policy Shifting the AD: Tax Policy Summarizing the Three Methods of Shifting AD Unemployment Inflation Designing Macroeconomic Policy: An Exercise Demand-Pull Inflation Cost-Push Inflation The Index of Leading Economic Activity, napm, and Some "Non-traditional" Indicators Discussion Questions Long-Term Interest Rates, the Yield Curve, and Hyperinflation Expected Inflation and Long-Term Interest Rates: The Fisher Effect The Yield Curve: A Macroeconomic Perspective Week Ago Negative Real Rates and SAP Bubbles Hyperinflations The Anatomy of a Meltdown Hyperinflations: Remedies Monetary Discipline: The Hazards of Pegging Discussion Questions ISLM: The Engine Room The IS Curve Some IS Exercises Introducing Taxes into the IS Curve The LM Curve Factors (hat Shift the LM ISLM-ADAS Policy Exercises Survival Guide to ISLM-ADAS Policy Analysis ISLM-ADAS Policy Experiment I ISLM-ADAS Policy Experiment n 164

4 Contents xix ISLM-ADAS Policy Exercise HI: An Increase in Tax Rates ISLM-ADAS Policy Exercise IV: Simultaneous Increases in Government Spending and Monetary Growth ("Fine-Tuning") Summarizing IS and LM Shifts The Global IS Global IS: A Brief Overview Discussion Questions The Classical Model Classical Aggregate Supply: Derivation Derivation Sequence Policy Exercise I: Increase in G ISLM-ADAS Policy Exercise II: Increase in M The "Natural" Rates of GDP and Employment Growth Discusssion Questions The Keynesian Model Keynesian Aggregate Supply: Diagrammatic Derivation Derivation Sequence Survival Guide for Islm with Keynesian as (K-AS) Policy Exercise I: Increase in G Policy Exercise II: Increase in Monetary Growth Policy Exercise HI: Engineering a Soft Landing Policy Exercise IV: When Low Interest Rates Don't Work Increasing M Against a Backdrop of Collapsed Confidence Tax Inversion, Statutory Taxes, and Effective Taxes: 50 Foot Walls and 51 Foot Ladders The Phillips Curve The Yield Curve and the Keynesian Paradigm The Agony of a Paradigm Shift: The Great Depression Discussion Questions The Supply-Side Model and the New Economy The Expectations-Augmented AS Curve: An Explanation of the Paradigm Shift Diagrammatic Derivation: Expectations-Augmented Aggregate Supply Curve Paradigm Shift II: An Expectations-Augmented Explanation 237

5 XX Contents 10.2 Supply-Side Economics Significant Income Tax Cuts Sweeping Corporate/Business Tax Cuts Deregulation Supply-Side Stabilization Stagflation From the Supply-Side to the New Economy The Identification Problem A Keynesian Explanation of the "New" Economy Contrasting the "New" Economy with the "Old" One Can the Two Models Be Reconciled? The Outlook for the New Economy Which Model for Developed Economies? Discussion Questions Central Banks and Monetary Policy Institutional Framework: The Federal Reserve The Money Creation Process: How the Federal Reserve Changes the Money Supply Reserve Requirements and the Money Multiplier: The Theory Open Market Operations (OMOs) Changing the Discount Rate Changing the Required Reserve Ratio The Role of the Central Bank: How Should Monetary Policy Be Conducted? Milton Friedman and the Role of Monetary Policy Is Monetary Discipline Worth the Pain? The "Curse" of Humphrey-Hawkins The Taylor Rule Exchange Rate Pegging, Currency Crises, and Sterilization Discussion Questions 299 References 309 Index 313