INTERMEDIATE OPEN ECONOMY MACROECONOMICS - WINTER 2019 - Francesco Trebbi 1
Course Preliminaries Lecture Notes: I upload them online before class. They are comprehensive and detailed. All material is posted on my webpage: http://faculty.arts.ubc.ca/ftrebbi/309_trebbi.html Quizzes: I ll post online quiz material. Not graded, but useful for exercise and self-evaluation. Use it as preparation material or for furthering your understanding. No graded homework. If you need that kind of imposition to keep up, this is not your class. Midterms: 1 st Midterm on February 14th Will last 1h 20! 2 nd Midterm on March 14th Will last 1h 20! Final: UBC sets the date. No alternative arrangements. 2
Course Preliminaries (continued) Grading Policy: 100% midterms and final. I count each midterm once. I count final three times. In total, I will have five observations for midterms and finals. I will keep the three highest observations and average them. This implies that the midterms are optional (although, I strongly encourage you to take them much easier than the final). If you wish to get provisional grades you need to take the midterms. Readings/Must Reads: Assigned (encouraged). I will try to link to lectures. Readings are Fair Game For All Tests In Class: I really appreciate your participation. This is a hard class, so be prepared to answer direct questions this way I can check if you re getting it. If you do not like cold-calling, this is not your class. 3
Course Preliminaries (continued) Teaching Assistant: Nadhanael Gemaliel Vidala nadhanael@gmail.com Your first resource for simple questions on the material. Tutorial/discussion times are: Nadhanael ECON 309 L01 Tuesdays 6:00 PM to 7:00 PM in IONA 633 Nadhanael ECON 309 L02 Thursdays 6:00 PM to 7:00 PM in IONA 533 Nadhanael ECON 309 L03 Fridays 6:00 PM to 7:00 PM in IONA 633 Tutorials/discussions start in the January 7 week 4
Welcome to the Study of the Aggregate Economy This is Macroeconomics and here are some interesting objectives/questions: 1. Studying the long-run performance of the economy (Economic Growth) 2. Understanding (and forecasting) short-run fluctuations (the Business Cycle) 3. What determines Unemployment? 4. What drives price changes (Inflation)? 5. What is the role for economic policy and the government? (Monetary and Fiscal Policy) 6. How does the domestic economy interact and how is it influenced by the rest of the world? (Open Economy) Note: We ll motivate our study with examples from the US (mostly in class) and Canada (mostly in our Textbook). 5
US Business Cycle and Economic Growth Real GDP 1/1948 present Black line - trend in real GDP over time (black axis) defined later in the lecture Red line - real GDP growth (percentage change in real GDP) over time (right axis) Shaded areas represent official recession dates (as calculated by National Bureau of Economic Research) 6
US Historical Unemployment: 1/1948 present Black line US Unemployment Rate, seasonally adjusted (black axis) defined later in the lecture Shaded areas represent official recession dates (as calculated by National Bureau of Economic Research) 7
US Historical Inflation: 1/1948 present (Annualized) Black line Price Index (CPI) over time (black axis) defined later in the lecture Red line - Price growth (percentage change in CPI, aka Inflation) over time (right axis) Shaded areas represent official recession dates (as calculated by National Bureau of Economic Research) 8
US Monetary Policy Rate: 7/1954 present Shaded Areas Recession Years 9
US Monetary Policy Rate: 7/1954 present Shaded Areas Recession Years 10
Understanding what the Federal Reserve says Federal Reserve: FOMC Press Release Release Date: December 14, 2016 For immediate release Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments. In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. [boldface mine] We will understand what they mean. 11
Understanding what the Bank of Canada says Bank of Canada Press Release Release Date: 7 December 2016 For immediate release Bank of Canada maintains overnight rate target at 1/2 per cent The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent. Economic data suggest that global economic conditions have strengthened, as the Bank anticipated in its October Monetary Policy Report (MPR). However, uncertainty, which has been undermining business confidence and dampening investment in Canada s major trading partners, remains undiminished. Following the election in the United States, there has been a rapid back-up in global bond yields, partly reflecting market anticipation of fiscal expansion in a US economy that is near full capacity. Canadian yields have risen significantly in this context. In Canada, the dynamics of growth are largely as the Bank anticipated. Following a very weak first half of 2016, growth in the third quarter rebounded strongly, but more moderate growth is anticipated in the fourth quarter. Consumption growth was robust in the third quarter, supported by the new Canada Child Benefit, while the effects of federal infrastructure spending are not yet evident in the GDP data. Meanwhile, business investment and non-energy goods exports continue to disappoint. There have been ongoing gains in employment, but a significant amount of economic slack remains in Canada, in contrast to the United States. While household imbalances continue to rise, these will be mitigated over time by announced changes to housing finance rules. Total CPI inflation has picked up in recent months but is slightly below expectations, largely because of lower food prices. Core inflation is close to 2 per cent because the effect of persistent economic slack is still being offset by that of past exchange rate depreciation, although the latter effect is dissipating. Overall, the Bank s Governing Council judges that the current stance of monetary policy remains appropriate. Therefore, the target for the overnight rate remains at 1/2 per cent. 12
Federal Budget Deficit 13
Thoughts on Economic Outlook (2015 est.) In 2015 the US economy (production) was about $17.95 trillion (CAN $1.63 trillion) Population 324 million, labor force 157 million. (CAN 35 million) US Output per capita $55,800 (CAN $45,600) Inflation rate 1.7% (CAN 1.1%) Unemployment rate 5.3% (CAN 6.9%) Spending of Economic Agents (Consumers and firms spend when they are optimistic about the future). Consumers (~ 70% of the U.S. economy) (~ 57% of the CAN economy) Business (~ 16% of the U.S. economy) (~ 20% of the CAN economy) Government (~ 17% of the U.S. economy) (~ 23% of the CAN economy) Foreign Sector (~ -3% of the U.S. economy) (~ -1% of the CAN economy) 14
Real Household Spending: 1/1999 present (Consumption) Black Line Level of Spending (Left Axis) Red Line Percentage Change in Spending over Prior 12 months (Right Axis) Shaded Areas Recession Years 15
Real Business Spending: 1/1999 present (Investment) Black Line Level of Spending (Left Axis) Red Line Percentage Change in Spending over Prior 12 months (Right Axis) Shaded Areas Recession Years 16
US Balance on Current Account: 1960Q1 present Black Line Current Account Balance Shaded Areas Recession Years 17
Thoughts on the Current Economic Outlook Productivity? Secular Stagnation? Unemployment? (overall health of the U.S./CAN economy?) Spending of Economic Agents Consumers Business Government Foreign Sector Other Things on My Mind: EU Economic Crisis? Automation and Employment? US Fiscal crisis? Large Banks? TBTF? Central Bank Oversight and political influence on Monetary Policy 18
Interesting Questions We Will Address This Term What determines a country s output? What determines consumption choices? How do countries grow over long periods of time? Why do some countries grow faster than others? Why has Japan stagnated during the last two decades? Italy? Can rising oil prices increase the inflation rate? If so, how? Why do we care about rising inflation rates? What can the Federal Reserve do to mitigate rising inflation rates? Is there a cost to their policy? What happens in oil exporting countries? What is the role of the Central Bank in the macroeconomy? How do they influence interest rates? How do interest rates affect unemployment, production, etc.? How s Bernanke s regime different from Greenspan s? Should the Fed follow explicit policy rules (i.e., target a 2% inflation rate always) or should they follow some discretion? 19
Interesting Questions We Will Address This Term What are the role of labor markets in the economy? What is a job-less recovery? Is this a new phenomenon? (Yes) Has the U.S. economy become more stable during the last 25 years? (Yes/No). Why? Has macro policy gotten better? (Yes/No) Have fundamentals in the economy changed? (Yes) Does the executive have significant impact on the economy in the short run? (Not really) Can they affect the economy in the long run? (Yes) Can large budget deficits hinder economic growth in the long run? (Yes) Why? Should macro economists care about current account deficits? (Sometimes) Why could large trade deficits be a good thing for an economy? How important is outsourcing? Other topics: What role do consumers play in the macroeconomy? Can a housing slump cause a (severe) recession? How would social security reform affect the macroeconomy? Low savings rates? 20
Your Questions? What do you hope to learn from this course? Do you potentially plan to use any of our tools in your future career? 21