Monetary Theory and Policy Graphs. David L. Kelly. Department of Economics University of Miami Box Coral Gables, FL

Transcription

1 Monetary Theory and Policy Graphs David L. Kelly Department of Economics University of Miami Box Coral Gables, FL First Version: Spring 211

2 I Introduction A CPI/Inflation 25 Consumer Price Index (all goods, average = Something that costs $1 in 1983 costs $219 today CPI year Figure 1: Consumer Price Index 1

3 25 CPI Inflation 197s oil crises cpi inflation 5 5 Great Moderation Deflation during Great Depression year Figure 2: Consumer Price Index Inflation 2

4 2 M1 over time Current Expansion By the FED M1 1 Postwar Expansion Little growth before WWII year Figure 3: M1 3

5 B GDP/Unemployment 11 1 Unemployment 1981 Recession Current Recession Recession 8 percent Recession year Figure 4: Unemployment Rate 4

6 14 Real GDP 25 chained dollars current recession recession recession Billions of dollars year Figure 5: Real GDP 5

7 Shifting Phillips Curve Before π u Figure 6: Inflation and Unemployment: The shifting Phillips Curve 6

8 25 Taylor Rule vs Actual FED Funds 2 Taylor Rule Actual FED Funds 15 R 1 5 recent deviations from Taylor rule year Figure 7: The Taylor Rule 7

9 C Recessions Real Gross Domestic Product (GDP): last 4 recessions. Percent change from previous peak Quarters after GDP peaked Figure 8: RGDP: Last 4 recessions 8

10 9 8 7 Current Population Survey Unemployment: last 4 recessions. Percent change from previous peak Months after GDP peaked Figure 9: Unemployment: Last 4 recessions 9

11 Fixed Investment: last 4 recessions. Percent change from previous peak Quarters after GDP peaked Figure 1: Fixed Investment: Last 4 recessions 1

12 4 3 Residential Investment: last 4 recessions. Percent change from previous peak Quarters after GDP peaked Figure 11: Residential Investment: Last 4 recessions 11

13 II Money A Measures of Money 9 M1 and M2, Seasonally Adjusted, Over Time 8 M1 M2 7 6 Billions of dollars Year Figure 12: M1 and M2 over time. 12

14 6 M2/M1, Seasonally Adjusted, Over Time 5.5 M2/M1 Linear Trend Billions of Dollars High Nominal Interest Rates Low Nominal Interest Rates Year Figure 13: Ratio of M2 to M1 over time. Deregulation and technological advances result in households shifting to M2. But decisions to hold M1 versus M2 are closely related to real interest rates and inflation. 13

15 Monetary Base, Not Seasonally Adjusted H Year Figure 14: Monetary Base Over Time. The monetary base more than doubled during the crises. 14

16 B Reserves Total, Required, and Excess Reserves, not seasonally adjusted Total Reserves Required Reserves 1 Billions of Dollars 8 6 Excess Rerserves Year Figure 15: Total, Required, and Excess Reserves By Depository Institutions. Excess reserves increased from $1.88 Billion prior to the crises to $1, at the height of the crises, to $1,7.17 today. 15

17 1 9 Total, Required, and Excess Reserves, not seasonally adjusted Total Reserves Required Reserves 8 Excess Reserves Billions of Dollars Year Figure 16: Total, Required, and Excess Reserves since

18 7 Reserve Components: Pre Crises 6 5 Billions of Dollars FED Deposits Vault Cash Required Clearing Balances Excess Reserves Year Figure 17: How banks manage reserves in normal times. Since the mid-199s, applied vault cash has increased due to the advent of ATMs. Required clearing balances to cover clearing of interstate checks and other FED functions provided for a fee has also increased. Excess reserves averaged less than $1 billion. Most of the post-crises increase in excess reserves is held as deposits at the FED. 17

19 22 Consumption and Income Velocity 2 18 consumption velocity income velocity 16 times per year High interest rates Low rates year Figure 18: Consumption and income velocity are roughly proportional, indicating government and firms respond in similar ways to consumers with respect to the effect of interest rates on money holdings. Velocity tends to increase with interest rates. Velocity has also been trending upward over time, probably due to technological advances that allow consumers easy access to savings. 18

20 III Phillips Curve Figure 19: Original Phillips Curve. 19

21 Recessions π Booms Y Figure 2: Original Phillips Curve using GDP. 2

22 21 Figure 21: Inflation and long run growth. Graph is Figure (1) from Bruno, M. and William Easterly Inflation Crises and Long Run Growth, Journal of Monetary Economics, vol. 41 (February 1998): pp

23 5 US Phillips Curve: π Y Figure 22: US Phillips Curve: more time periods. 22

24 Shifting Phillips Curve Before π u Figure 23: US Phillips Curve. 23

25 IV Implementation 2 Federal Funds Rate 18 Target H Target R percent 12 1 Target E Jan6 Jan7 Jan8 Jan9 Jan Jan1 Date Figure 24: Federal Funds Rate. When the FED targets H, volatility in R increases. When the FED targets the FED funds rate, volatility in R reduces. Remaining volatility in the FED funds rate is due to frequent adjustments of the target. 24

26 2 Annual Percent Change in High Powered Money Target R 15 Target E Target H Annual percent change Jan6 Jan7 Jan8 Jan9 Jan Jan1 Date Figure 25: Annual change in the high powered money stock. Volatility in H was lower during the period when it was targeted by the FED. Volatility in H is higher when the FED targeted R. 25