Rohit. January 24, 2012
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1 South Asian University January 24, 2012
2 Outline of the Presentation
3 Outline of the Presentation Vertical Phillips Curve () Vs Horizontal Phillips Curve ().
4 Outline of the Presentation Vertical Phillips Curve () Vs Horizontal Phillips Curve (). : priorities
5 Outline of the Presentation Vertical Phillips Curve () Vs Horizontal Phillips Curve (). : priorities Monetary policy Vs Fiscal Policy.
6 Outline of the Presentation Vertical Phillips Curve () Vs Horizontal Phillips Curve (). : priorities Monetary policy Vs Fiscal Policy. Tax cuts Vs Spending Increase.
7 Outline of the Presentation Vertical Phillips Curve () Vs Horizontal Phillips Curve (). : priorities Monetary policy Vs Fiscal Policy. Tax cuts Vs Spending Increase. Favouring 1% over the 99%.
8
9 Theory
10 Theory PC: π t = π e t α(ut U NAIRU); π = Inflation; U = Unemployment
11 Theory PC: π t = π e t α(ut U NAIRU); Vertical Phillips Curve π t + ω t π t-1 LRPC New Keynesian SRPC (π e t = ω t ) π = Inflation; U = Unemployment Basic Arguments: O (NAIRU) U * U t Friedman's SRPC (π e t =π t-1 ) - Capitalism is self-equilibrating. 1. Real Balance Effect (Outside money) 2. Inflation targeting and RatEx (Inside Money).
12 Theory PC: π t = π e t α(ut U NAIRU); Vertical Phillips Curve π t + ω t π t-1 LRPC New Keynesian SRPC (π e t = ω t ) π = Inflation; U = Unemployment Basic Arguments: Monetarism: π e t = π t 1 Short Run: U t U NAIRU. Long Run: U t = U NAIRU. O (NAIRU) U * U t Friedman's SRPC (π e t =π t-1 ) - Capitalism is self-equilibrating. 1. Real Balance Effect (Outside money) 2. Inflation targeting and RatEx (Inside Money).
13 Theory PC: π t = π e t α(ut U NAIRU); Vertical Phillips Curve π t + ω t π t-1 O LRPC (NAIRU) U * New Keynesian SRPC (π e t = ω t ) U t Friedman's SRPC (π e t =π t-1 ) π = Inflation; U = Unemployment Basic Arguments: Monetarism: π e t = π t 1 Short Run: U t U NAIRU. Long Run: U t = U NAIRU. New Classicals: π e t = πt + ɛ Short Run: U t = U NAIRU. Long Run: U t = U NAIRU. - Capitalism is self-equilibrating. 1. Real Balance Effect (Outside money) 2. Inflation targeting and RatEx (Inside Money).
14 Theory PC: π t = π e t α(ut U NAIRU); Vertical Phillips Curve π t + ω t π t-1 O LRPC (NAIRU) U * New Keynesian SRPC (π e t = ω t ) U t Friedman's SRPC (π e t =π t-1 ) π = Inflation; U = Unemployment Basic Arguments: Monetarism: π e t = π t 1 Short Run: U t U NAIRU. Long Run: U t = U NAIRU. New Classicals: π e t = πt + ɛ Short Run: U t = U NAIRU. Long Run: U t = U NAIRU. No policy required. - Capitalism is self-equilibrating. 1. Real Balance Effect (Outside money) 2. Inflation targeting and RatEx (Inside Money).
15 Theory PC: π t = π e t α(ut U NAIRU); Vertical Phillips Curve π t + ω t π t-1 O - LRPC (NAIRU) U * New Keynesian SRPC (π e t = ω t ) U t Friedman's SRPC (π e t =π t-1 ) π = Inflation; U = Unemployment Basic Arguments: Monetarism: π e t = π t 1 Short Run: U t U NAIRU. Long Run: U t = U NAIRU. New Classicals: π e t = πt + ɛ Short Run: U t = U NAIRU. Long Run: U t = U NAIRU. No policy required. New Keynesians: π e t = Ẇ t 1 Short Run: U t U NAIRU. Long Run: U t = U NAIRU. Capitalism is self-equilibrating. 1. Real Balance Effect (Outside money) 2. Inflation targeting and RatEx (Inside Money).
16 Theory PC: π t = π e t α(ut U NAIRU); Vertical Phillips Curve π t + ω t π t-1 O - LRPC (NAIRU) U * New Keynesian SRPC (π e t = ω t ) U t Friedman's SRPC (π e t =π t-1 ) Capitalism is self-equilibrating. 1. Real Balance Effect (Outside money) 2. Inflation targeting and RatEx (Inside Money). π = Inflation; U = Unemployment Basic Arguments: Monetarism: π e t = π t 1 Short Run: U t U NAIRU. Long Run: U t = U NAIRU. New Classicals: π e t = πt + ɛ Short Run: U t = U NAIRU. Long Run: U t = U NAIRU. No policy required. New Keynesians: π e t = Ẇ t 1 Short Run: U t U NAIRU. Long Run: U t = U NAIRU. No policy required in the long run.
17 Theory PC: π t = π e t α(ut U NAIRU); Vertical Phillips Curve π t + ω t π t-1 O - LRPC (NAIRU) U * New Keynesian SRPC (π e t = ω t ) U t Friedman's SRPC (π e t =π t-1 ) Capitalism is self-equilibrating. 1. Real Balance Effect (Outside money) 2. Inflation targeting and RatEx (Inside Money). π = Inflation; U = Unemployment Basic Arguments: Monetarism: π e t = π t 1 Short Run: U t U NAIRU. Long Run: U t = U NAIRU. New Classicals: π e t = πt + ɛ Short Run: U t = U NAIRU. Long Run: U t = U NAIRU. No policy required. New Keynesians: π e t = Ẇ t 1 Short Run: U t U NAIRU. Long Run: U t = U NAIRU. No policy required in the long run. In no way can the economy cross its U NAIRU. And it reaches there on its own.
18 Theory
19 Theory PC: π t = Z + max(0, π t 1 α(u t U min )); Z = cost-push
20 Theory PC: π t = Z + max(0, π t 1 α(u t U min )); L-shaped Phillips Curve π t + LRPC Z = cost-push O U min SRPC NAIRUs U t - Fluctuates between chronic unemployment and inflation.
21 Theory PC: π t = Z + max(0, π t 1 α(u t U min )); L-shaped Phillips Curve π t + LRPC Z = cost-push O U min SRPC NAIRUs U t - Fluctuates between chronic unemployment and inflation. 1. Inflation can t be negative.
22 Theory PC: π t = Z + max(0, π t 1 α(u t U min )); L-shaped Phillips Curve π t + LRPC Z = cost-push O U min SRPC NAIRUs U t - Fluctuates between chronic unemployment and inflation. 1. Inflation can t be negative. 2. No RatEx.
23 Theory PC: π t = Z + max(0, π t 1 α(u t U min )); L-shaped Phillips Curve π t + LRPC Z = cost-push U U min (Robinson s Inflationary Barrier). Diametrically opposite to the New Classicals. O U min SRPC NAIRUs U t - Fluctuates between chronic unemployment and inflation. 1. Inflation can t be negative. 2. No RatEx.
24 Theory PC: π t = Z + max(0, π t 1 α(u t U min )); L-shaped Phillips Curve π t + LRPC Z = cost-push U U min (Robinson s Inflationary Barrier). Diametrically opposite to the New Classicals. Policy (particularly fiscal) required both in long and short run. O U min SRPC NAIRUs U t - Fluctuates between chronic unemployment and inflation. 1. Inflation can t be negative. 2. No RatEx.
25 Theory PC: π t = Z + max(0, π t 1 α(u t U min )); L-shaped Phillips Curve π t + LRPC Z = cost-push U U min (Robinson s Inflationary Barrier). Diametrically opposite to the New Classicals. Policy (particularly fiscal) required both in long and short run. O - U min SRPC NAIRUs Fluctuates between chronic unemployment and inflation. 1. Inflation can t be negative. 2. No RatEx. U t A critique At lower rates of unemployment (U < U min ), accelerating inflation sets in as workers bargaining strength increases. However, by accepting a lower bound to unemployment, heterodox theory itself can come under attack for accepting a limit to policy intervention. With increased monopolisation and unionisation, space for policy intervention gets constrained (U min ).
26 Extending the heterodox theory Horizontal PC π t O + SRPC NAIRUs LRPC U t Workers bargaining strength takes a beating because of threat of job flight to the periphery. - Increased Policy Space under globalisation [Govt can push U as low as required]
27 Extending the heterodox theory Horizontal PC π t O + SRPC NAIRUs LRPC U t Workers bargaining strength takes a beating because of threat of job flight to the periphery. Their nominal wages are tethered to that of the peripheral workers. - Increased Policy Space under globalisation [Govt can push U as low as required]
28 Extending the heterodox theory Horizontal PC π t O + SRPC NAIRUs LRPC U t Workers bargaining strength takes a beating because of threat of job flight to the periphery. Their nominal wages are tethered to that of the peripheral workers. Relationship between unemployment and wage inflation breaks down. - Increased Policy Space under globalisation [Govt can push U as low as required]
29 Extending the heterodox theory Horizontal PC π t O + - SRPC NAIRUs LRPC U t Workers bargaining strength takes a beating because of threat of job flight to the periphery. Their nominal wages are tethered to that of the peripheral workers. Relationship between unemployment and wage inflation breaks down. Phillips curve becomes horizontal with no U min. Increased Policy Space under globalisation [Govt can push U as low as required]
30 Extending the heterodox theory Horizontal PC π t O + - SRPC NAIRUs LRPC Increased Policy Space under globalisation [Govt can push U as low as required] U t Workers bargaining strength takes a beating because of threat of job flight to the periphery. Their nominal wages are tethered to that of the peripheral workers. Relationship between unemployment and wage inflation breaks down. Phillips curve becomes horizontal with no U min. Source of inflation is primarily from the cost-push side (like oil shocks, futures trading, speculation etc.). Demand-pull inflation disappears.
31 Extending the heterodox theory Horizontal PC π t O + - SRPC NAIRUs LRPC Increased Policy Space under globalisation [Govt can push U as low as required] U t Workers bargaining strength takes a beating because of threat of job flight to the periphery. Their nominal wages are tethered to that of the peripheral workers. Relationship between unemployment and wage inflation breaks down. Phillips curve becomes horizontal with no U min. Source of inflation is primarily from the cost-push side (like oil shocks, futures trading, speculation etc.). Demand-pull inflation disappears. If core s nominal wage (ω), peripheral nominal wage (ω a ), core s unemployment rate (U), expected price (p e ), then ω t = min[θω a t, max{pe α(u t), ω t 1 }], θ > 1
32 Extending the heterodox theory Horizontal PC π t O + - SRPC NAIRUs LRPC Increased Policy Space under globalisation [Govt can push U as low as required] U t Workers bargaining strength takes a beating because of threat of job flight to the periphery. Their nominal wages are tethered to that of the peripheral workers. Relationship between unemployment and wage inflation breaks down. Phillips curve becomes horizontal with no U min. Source of inflation is primarily from the cost-push side (like oil shocks, futures trading, speculation etc.). Demand-pull inflation disappears. If core s nominal wage (ω), peripheral nominal wage (ω a ), core s unemployment rate (U), expected price (p e ), then ω t = min[θω a t, max{pe α(u t), ω t 1 }], θ > 1 π t = Z + min[δ ω a t, max(0, π t 1 α(u t U min ))] Z = cost-push
33 Increased Policy Space In Globalisation Source: Kuttner and Robinson (2010)
34 Increased Policy Space In Globalisation Table: Estimation Results Dependent Variable: Growth in Per Unit Nominal Labour Cost (ω t ) Coefficients Source: Kuttner and Robinson (2010) Variables: Pre-Globalization Globalization (1960:Q1-1983:Q4) (1984:Q1-2010:Q4) Constant (0.001) 0.001(0.002) π t ***(0.069) 1.325***(0.343) U t ***(0.006) 0.015(0.011) ωt a [Mexico] 0.009***(0.003) Hansen Test 0.34(P Value: 0.84) 3.19(P Value: 0.36) No. of Obs Notes: 1) *** indicates significance at the 1% level. 2) Standard errors are in the parenthesis. Source: and Das (2012) working paper.
35 Monetary Policy Fiscal Policy
36 Current condition of the US economy Output Gap as a % of actual GDP Potential GDP Vs Actual GDP in the US (Real values in 2005 dollars) % 7.4% Monetary Policy Fiscal Policy n US$ in billion Q1 2001Q3 2003Q1 2004Q3 2006Q1 2007Q3 2009Q1 2010Q3 Source: Hersh and Vij (2011) Updated
37 When will the Output Gap Close? Two scenarios under the Obama Stimulus $ S U d i a e n h 5c 0 f2 so o bili n (i n P D G l a Re Q Q4 2011Q4 2013Q4 2015Q4 2017Q4 2019Q4 2021Q4 Monetary Policy Fiscal Policy Potential GDP Highest (0.96 % p.q) Actual GDP Average (0.59 % p.q) Source: Author s Calculation from Bureau of Economic Analysis (BEA) [Actual GDP] and Congressional Budget Office (CBO) [Potential GDP]
38 ) D P G f G t u O u ) nu Limitations to the Monetary Policy L i q u i d i t y T r a p i n t h e U S %o ( ap tp Q1 2009Q1 2010Q1 2011Q t e 2 d ra s 2 df e 1 lf in a m 1 No 0 % (in Monetary Policy Fiscal Policy Output Gap Fed Funds Rate Source: Author s Calculation from BEA and Federal Reserve Statistics Federal Funds rate has been close to 0 since 2009:Q1 i.e. for 3 years. There is hardly more that can be done on this front.
39 Is Spending more productive than Tax Cuts? Type of Activity Estimated Output Multipliers Low Estimate High Estimate Spending Federal Govt s purchases of goods and services Transfer to state govts for Infrastructure Transfer to state govts for other purposes Transfer Payments to Individuals One-Time Payments to Retirees Tax Cuts For lower and middle-income For higher-income Corporate Tax Source: CBO (2011) Monetary Policy Fiscal Policy Social sector spending is almost double as productive as tax cuts!
40 Is Spending more productive than Tax Cuts? Type of Activity Estimated Output Multipliers Low Estimate High Estimate Spending Federal Govt s purchases of goods and services Transfer to state govts for Infrastructure Transfer to state govts for other purposes Transfer Payments to Individuals One-Time Payments to Retirees Tax Cuts For lower and middle-income For higher-income Corporate Tax Source: CBO (2011) Monetary Policy Fiscal Policy Social sector spending is almost double as productive as tax cuts! Despite making economic sense, why is it not Obama s priority?
41 99% are not a priority, Employment Generation Under 4 scenarios To otal Employm ment (in million n) if 500,000 jobs are if 1 miilion added (approx) jobs are added Mar 2014 Dec 2012 Sept 2018 Working People Capitalist Class Actual Employment (to Dec 2011) Jan-07 Sep-08 May-10 Jan-12 Sep-13 May-15 Jan-17 Sep-18 May-20 Jan-22 Sep-23 May-25 Jan-27 Sep-28 May-30 Jan-32 Source: Hersh and Vij (2011). Updated with minor addition Current 3-month rate: 137,000 jobs p.m. Clinton Era rate: 200,000 jobs p.m. Labour Force growth: 100,000 p.m.
42 but 1% is! Bailouts Vs Spending in trillion US$ Outright Bail outs Indirect Insurance to financial corporations Expenditure Programs Amt. Committed Prominent Bail-outs* Amt. Committed Troubled Asset Relief $700 billion Fannie Mae and Freddie Mac $1.6 trillion Program (TARP) Fed Rescue Efforts $6400 billion Citigroup $245.4 billion FDIC total $45.4 billion AIG $182 billion Other financial total $1700 billion Bank of America $124.5 billion Other housing total $745 billion Automobile Industry $85.1 billion Fiscal Stimulus $1200 billion Bear Stearns $29 billion Total $11 trillion Financial Vs Real Initiatives Financial Initiatives $9.5 trillion Real Initiatives $1.2 trillion Outright Bail-outs $1.5 trillion Tax Cuts $456 billion Indirect Insurance $4.6 trillion Unemployment benefits $8 billion Increasing Liquidity $3.4 trillion Students Loan guarantees $195 billion ARRA Stimulus $499 billion Cash for clunkers $3 billion Advanced Tech Vehicles Program $25 billion Priority Quotient (Fiscal Expenditure/Financial Initiatives) 7% * Includes other financial assistance Source: Author s calculations based on data available at CNNMoney; Note: Figures as of Nov. 16, 2009 Working People Capitalist Class
43 However, Working People Capitalist Class
44 References Adam Hersh and Vij (2011), Employment Growth Continues, but Too Slowly to Secure Recovery, Center for American Progress, January 7. Congressional Budget Office Report (2011), Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from April 2011 Through June 2011, August. Working People Capitalist Class K. Kuttner and T. Robinson (2010), Understanding the flattening phillips curve, The North American Journal of Economics and Finance, 21(2): and Anupam Das (2012), Increased Policy Space Under Globalisation, Working Paper.
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