Outline Introduction Economic Policy. Economic Policy. Bilgin Bari

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Leonard Benedict Waters
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2 1 2 Design of Conduct of

3 I The whole of science is nothing more than the refinement of everyday thinking. Albert Einstein Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. (L.Robbins, 1935) Macroeconomics is the study of economy as a whole.

4 II refers to the actions that governments take in the economic field (politics) analyses policies by developing economic models and using actual data (economics)

5 Problems of Macroeconomics 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?

6 Toolbox of Macroeconomist 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 Economic Model Economic Data

7 Toolbox of Macroeconomist II Economic Theory It s a logical framework to explain a particular economic phenomenon. For example, The Quantity Theory of Money explains the inflation phenomenon using money growth: MxV = PxY

8 Toolbox of Macroeconomist III 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.

9 Toolbox of Macroeconomist IV

10 Toolbox of Macroeconomist V 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.

11 Toolbox of Macroeconomist VI

12 Macroeconomic Data Outline 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

13 Gross Domestic Product I

14 Gross Domestic Product II

15 Gross Domestic Product III

16 Gross Domestic Product IV

17 Gross Domestic Product V

18 Unemployment I Outline

19 Unemployment II Outline

20 Unemployment III Outline

21 Inflation I Outline

22 Inflation II Outline

23 Inflation III Outline

24 Inflation IV Outline

25 Inflation V Outline

26 Inflation VI Outline

27 Inflation VII Outline

28 Current Account Balance I

29 Current Account Balance II

30 Government I Outline

31 Government II Outline

32 Interest Rate I Outline

33 Interest Rate II Outline

34 Interest Rate III Outline

35 Interest Rate IV Outline

36 Design of Conduct of Design of Economic policy is designed for the 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.

37 Design of Conduct of Goals of stabilizing economic activity not economic growth to reduce the difference [actual GDP-potential GDP] stabilizing inflation (price stability) stabilizing unemployment to reduce (actual level of unemployment-natural level of unemployment) exchange rate stability financial stability

38 Design of Conduct of Macroeconomic Policy 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

39 Design of Conduct of Monetary Policy 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)

40 Design of Conduct of Fiscal Policy Fiscal policy support monetary policy by controlling government budget. budget deficit and inflation excess demand issued money (printing money)

41 Design of Conduct of Monetary Policy 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 - especially expansion term in the economy - Economic policy or policy makers should prevent risks

42 Readings Outline Design of Conduct of Economic s: The User s Guide, Ha-Joon Chang Economic Rules, Dani Rodrik

43 Readings (Turkish) Outline Design of Conduct of

Monetary Theory and Policy

Monetary Theory and Policy October 16, 2015 1 Basics Problems of Macroeconomics Analysis of Policy Effects 2 Conduct of 3 Explaning Analyzing Definitions Outline Basics Problems of Macroeconomics Analysis of Policy Effects Economics