Intermediate Open Economy Macroeconomics Martin Ellison 1
Course preliminaries Lecture notes: I upload them online before class. They are comprehensive and detailed. All material is posted on my webpage: http://users.ox.ac.uk/~exet2581/ubc/ubc.html Practice: I ll post some online practice material. Not graded, but useful for exercise and self-evaluation. Use it as preparation material or for furthering your understanding. No graded homework. Midterms: 1 st midterm on February 13 2 nd midterm on March 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 3
Course preliminaries (continued) Teaching Assistant: Mahdi Ibrahimi Kahou mahdi.ebk@gmail.com Your first resource for simple questions on the material Tutorial/discussion times are: ECON 309 L01 Tuesdays ECON 309 L02 Thursdays ECON 309 L03 Fridays 6:00 PM to 7:00 PM 6:00 PM to 7:00 PM 6:00 PM to 7:00 PM Tutorials/discussions start in the week commencing January 8 4
Welcome to the study of the aggregate economy 1. Studying the long-run performance of the economy (economic growth) 2. Understanding (and forecasting) short-run fluctuations (business cycle) 3. What determines unemployment? 4. What drives inflation? 5. What role for economic policy and the government? (monetary and fiscal policy) 6. How economy interacts and is influenced by the rest of the world? (open economy) 5
What will the Dow Jones Index be on 5 th April 2018?
U.S. business cycle and economic growth, real GDP: 1/1947 present Blue line / left axis is real GDP Red line / right axis is real GDP growth (% change in real GDP since previous year) Shaded areas are official recession dates (as calculated by NBER) 6
U.S. historical unemployment: 1/1948 present Black line is seasonally adjusted US Unemployment Rate 8
U.S. historical inflation: 1/1948 present Blue line / left axis is Consumer Price Index (CPI) Red line / right axis is Inflation (% change in CPI since previous year) 9
U.S. monetary policy rate: 7/1954 present Effective Federal Funds Rate 10
U.S. monetary policy rate: 7/1954 present Effective Federal Funds Rate 11
Understanding what the Federal Reserve says December 13, 2017 Federal Reserve issues FOMC Statement 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 rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. 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 1-1/4 to 1-1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained 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. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant 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. Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Randal K. Quarles. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate. 12
Understanding what the Bank of Canada says Release date: December 6, 2017 Bank of Canada maintains overnight rate target at 1 per cent The Bank of Canada today maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent. The global economy is evolving largely as expected in the Bank s October Monetary Policy Report (MPR). In the United States, growth in the third quarter was stronger than forecast but is still expected to moderate in the months ahead. Growth has firmed in other advanced economies. Meanwhile, oil prices have moved higher and financial conditions have eased. The global outlook remains subject to considerable uncertainty, notably about geopolitical developments and trade policies. Recent Canadian data are in line with October s outlook, which was for growth to moderate while remaining above potential in the second half of 2017. Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter. Business investment continued to contribute to growth after a strong first half, and public infrastructure spending is becoming more evident in the data. Following exceptionally strong growth earlier in 2017, exports declined by more than was expected in the third quarter. However, the latest trade data support the MPR projection that export growth will resume as foreign demand strengthens. Housing has continued to moderate, as expected. Inflation has been slightly higher than anticipated and will continue to be boosted in the short term by temporary factors, particularly gasoline prices. Measures of core inflation have edged up in recent months, reflecting the continued absorption of economic slack. Revisions to past quarterly national accounts have resulted in a higher level of GDP. However, this is unlikely to have significant implications for the output gap because the revisions also imply a higher level of potential output. Meanwhile, despite rising employment and participation rates, other indicators point to ongoing albeit diminishing slack in the labour market. Based on the outlook for inflation and the evolution of the risks and uncertainties identified in October s MPR, Governing Council judges that the current stance of monetary policy remains appropriate. While higher interest rates will likely be required over time, Governing Council will continue to be cautious, guided by incoming data in assessing the economy s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation. 12
Federal budget deficit 14
Thoughts on economic outlook (2016/17) U.S. economy (production) in 2016 was $18.57 trillion (CAN $1.53 trillion) U.S. population in 2017 was 325 million, labour force 160 million (CAN 35/19 million) U.S. output per capita in 2016 $57,100 (CAN $43,700) U.S. inflation rate in 2017 1.8% (CAN 1.4%) U.S. unemployment rate in 2017 4.1% (CAN 6.3%) Spending of economic agents in 2016: Consumers Business Government Foreign Sector (~ 69% of the U.S. economy) (~ 57% of the CAN economy) (~ 16% of the U.S. economy) (~ 19% of the CAN economy) (~ 18% of the U.S. economy) (~ 25% of the CAN economy) (~ -3% of the U.S. economy) (~ -2% of the CAN economy) 15
Real household spending: 1/1999 present (consumption) Blue line / left axis is Personal Consumption Expenditure (PCE) Red line / right axis is growth in PCE (% change since previous year) 16
Real business spending: 1/1999 present (investment) Blue line / left axis is real gross investment Red line / right axis is growth in real gross investment (% change from previous year) 17
U.S. balance on current account: 1960Q1 present Black line is Foreign Transactions in NIPA Accounts 18
Thoughts on the current economic outlook Overall health of the economy, productivity, secular stagnation, unemployment? Spending of consumers, business, government and foreign sector Other things on my mind: EU economic crisis Brexit Automation and employment US fiscal crisis Large banks and Too big to fail Central bank oversight and political influence on monetary policy 19
Interesting questions we will address this term What determines an economy s output? What determines consumption? How do economies grow over long periods of time? Why do some economies grow faster than others? Why has Japan stagnated during the last two decades? Why do we care about the inflation rate? What can the Federal Reserve about inflation? Is there a cost to their policy? Do rising oil prices increase inflation? What happens in oil exporting countries? What is the role of the central bank? How do they influence interest rates? How do interest rates affect the economy? What differences are there between the regimes of Chair Greenspan, Bernanke, Yellen and Powell? Should the Fed follow explicit policy rules (e.g., always target a 2% inflation rate) or should they have some discretion? 20
Interesting questions we will address this term What is the role of labour markets in the economy? What is a jobless recovery? Has the U.S. economy become more stable during the last 25 years? Has macroeconomic policy improved? Have fundamentals in the economy changed? Does the executive have significant impact on the economy in the short run? Can they affect the economy in the long run? Can large budget deficits hinder economic growth? Should economists care about current account deficits? Why might large trade deficits be a good thing for an economy? How important is outsourcing? What role do consumers play in the economy? Can a housing slump cause a recession? How would social security reform affect the economy? What about low savings rates? 21