* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Economics 3307
Survey
Document related concepts
Modern Monetary Theory wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Non-monetary economy wikipedia , lookup
Early 1980s recession wikipedia , lookup
Full employment wikipedia , lookup
Edmund Phelps wikipedia , lookup
Austrian business cycle theory wikipedia , lookup
Monetary policy wikipedia , lookup
Interest rate wikipedia , lookup
Fiscal multiplier wikipedia , lookup
Nominal rigidity wikipedia , lookup
Keynesian economics wikipedia , lookup
Business cycle wikipedia , lookup
Transcript
Economics 3307 Fall 2002 The Rest of Macroeconomics This course has covered Chapters 1-11 in the Mankiw text. We have addressed the determination in the long-run of employment, real wages, output, inflation, the unemployment rate, net exports, net foreign investment, the real interest rate, and the nominal interest rate. We have also considered the determinants of short-run fluctuations in output (and therefore unemployment through Okun’s Law), inflation, and interest rates. The purpose of this handout is to provide a necessarily cursory overview of some of the ideas and topics that we have not been able to address in detail this semester. Much of the rest of macro can be thought of as more detailed theories of why the curves of our models shift. That is, more advanced theories look more carefully at the ultimate exogenous forces that drive the economy. Short-Run Aggregate Supply Our discussion of short-run aggregate supply has been very simplistic: we have simply assumed the price level is “sticky” for a while and then “eventually” begins to adjust. The notion of short-run price stickiness is still an area of much disagreement among modern macroeconomists. I will use this opportunity to make just a few points: 1. 2. 3. 4. 5. There are many alternative ways to model price stickiness. Some imply a horizontal SRAS curve (like the one we have been using), and some imply an upward-sloping SRAS curve. Some short-run SRAS studies are based on “incomplete information.” In these stories, a change in AD is not met with a fully compensating change in P (thereby keeping the economy on LRAS) because economic agents are not fully aware of what is going on. This formulation has the interesting implication that effect on Y of changes in AD depends on the extent to which the change in AD is accurately expected and/or perceived. More generally, the nature of price stickiness is not well understood. Prices appear to be more sticky some times than others. Macroeconomists do not have a very good understanding of exactly what determines how quickly prices adjust to long-run equilibrium. Thus it is hard to predict how, or in some cases even whether, a change in AD will affect Y. The Phillips Curve graph has inflation on the vertical axis and the unemployment rate on the horizontal axis. The short-run Phillips curve slopes downward, and the long-run Phillips Curve is vertical. Essentially, the Phillips Curve is just an aggregate supply curve. The long-run Phillips Curve is vertical just as the LRAS curve is vertical. Changes in AD have no effect on output or unemployment in the long-run, but they can have an effect in the short-run. In the 1960s, some policymakers viewed the short-run Phillips Curve as a “policy menu,” but that idea now has little overt acceptance. While economists differ in their opinions as to how policy-induced changes in AD affect Y, few would argue that AD policy can come even remotely close to controlling Y perfectly. The idea of short-run price stickiness is hard to reconcile with basic micro concepts such as utility and profit maximization. If a market is not clearing, there are foregone gains from trade (that is, there are trades not being made that if undertaken would make both buyer and seller better off). There are two responses to this difficulty. One group of economists try to find better justifications for price stickiness. This is New Keynesian macroeconomics. The other tries to see how much can be explained without resorting to the assumption of price stickiness. This is the Real Business Cycle (RBC) Theory. The RBC theory in effect assumes there are only LRAS and AD curves – the SRAS does not exist. Fluctuations in Y must therefore reflect shifts in LRAS, which are primarily due to “technology shocks.” Economists disagree about how well RBC theories explain the observed facts of modern macroeconomic fluctuations. The Open Economy in the Short-Run 1. 2. 3. International trade affects aggregate demand because of fluctuations in net exports. This can easily be viewed as other sources of shifts in AD. To the extent that intermediate goods (goods used in the production of final goods and services) are imported, changes in the prices of imports can affect the economy like a supply shock. Changes in the nominal exchange rate can also have this kind of affect. Open economy considerations complicate policy. Monetary policy will often face an irresolvable conflict between domestic policy goals (e.g., an expansionary policy to prevent a recession) and international policy goals (e.g., tighten policy to prevent one’s currency from losing value). Fiscal policy actions in an open economy can end up having more effect on the exchange rate than on AD. Other Points 1. 2. 3. 4. 5. 6. There are advanced macro theories about all the basic behavioral functions (consumption, investment, money demand). Most of these theories link the behavior in question more explicitly to utility and profit maximization. One interesting branch of advanced theories involves the so-called permanent income/lifecycle hypothesis (PI/LCH) of consumption. The idea is that consumption today depends not just on income today, but also on expectations of future income. The theory implies that changes in income perceived to be permanent will have a bigger effect on consumption than changes in income that are perceived to be temporary. The PI/LCH means that the effects of fiscal policy depend on expectations about future taxes. If taxes are cut today but people expect them to be increased in the future, AD will not change as much as we thought. The idea of Ricardian Equivalence says that decreases in government saving today (say with lower T or higher G) will be EXACTLY offset by increases in private saving as people expect higher future taxes. Thus fiscal policy does not shift the IS or AD curves, and government deficits do not affect interest rates. There is actually some empirical evidence in support of Ricardian equivalence. Growth Theory: endogenous technical change; cross-country studies Sources of Information: NBER (esp. email update); FRBSF (esp. weekly letter)