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Transcript
MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT 2nd edition Money and Prices 1 11-2 Key Concepts Inflation Hyperinflation Inflation Tax and Seignorage Monetarism Money Neutrality Quantity Theory 11-3 Inflation The rate of change in the price level P(1) – P(0) Rate of Inflation = P(0) 11-4 UK Prices, 1661 - 1991 11-5 UK Inflation, 1661 - 1999 11-6 U.S. Prices, 1800 - 2000 11-7 G7 Inflation, 1975 - 2000 30 Canada 25 USA France 20 Germany 15 Italy 10 Japan 5 UK 0 -5 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 11-8 Measuring Inflation Consumer Price Index (CPI) Producers’ Price Index (PPI) GDP Deflator Ratio of Nominal GDP to Real GDP Mis-measurement issues Substitution Quality 11-9 Money Neutrality Price level is a yardstick Nominal measure Does it matter which unit we use? Double all prices and incomes Is your welfare the same, better, or worse? 11-10 Costs of Inflation Tax system Bracket creep Shoe Leather costs Menu costs Transactions costs associated with changing prices Relative price issues Price signal sends wrong message Unexpected inflation Harms savers Effect on long-run growth 11-11 What about deflation? Two types of deflation Demand-induced Price uncertainty High ex-post real interest rates Real burden of debt Unexpected deflation Supply-induced 11-12 Money Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game. Donald Trump, "Trump: Art of the Deal" Money is a terrible master but an excellent servant. Phineas Taylor Barnum A billion here, a billion there - pretty soon it adds up to real money. Senator Everett Dirksen (1896 - 1969) 11-13 Money Why money Eliminates double coincident of wants problem facing barter economy Role of money Store of value Medium of exchange Unit of account Kinds of money Commodity Money Backed currency Fiat Currency 11-14 Money 11-15 11-16 11-17 The Money Supply M1: Currency Checkable deposits (i.e. demand deposits) Traveler’s Checks M2: M1 Savings and small time deposits (including money market deposit accounts) Retail money market mutual funds 11-18 Monetary Aggregates, (Billions $) M3 Source: Board of Governors On-line Statistics 11-19 Money Multiplier Vault Accumulation $10 $19 $26.10 … $100 $90 $71 … $100 $190 $261 Total Money Base Currency $100 … $1000 M1 11-20 Money Multiplier Deposits Needed Reserves (10%) Lend Out $1,000,000 $100,000 $900,000 900,000 90,000 810,000 810,000 81,000 729,000 729,000 72,900 656,100 . . . . . . . $10,000,000 . $1,000,000 . $9,000,000 11-21 Money Multiplier = 1/(reserve requirement) Assumes banks don’t hold excess reserves Assumes loans make it back to bank as deposits Assumes currency doesn’t leave country 3 parties that help determine money supply Central bank Private banks Individuals 11-22 Seignorage How does it work? Direct – print money Indirect – print money, buy and hold government debt Inflation Tax Decline in value of cash holdings due to inflation Seignorage can be the same as the inflation tax 11-23 Hyperinflation High and persistent rate of inflation Relationship to fiscal policy Finance government. spending via inflation tax Rising Inflation Declining value of Money People decrease money holdings by buying goods 11-24 The German hyperinflation 1922-23 (January 1922 =1) Currency Prices Real Money Inflation (% per month) Jan 1922 1 1 1.00 5 Jan 1923 16 75 0.21 189 July 1923 354 2021 0.18 386 Sept 1923 227777 645946 0.35 2532 20201256 191891890 0.11 29720 Oct 1923 11-25 11-26 Further Examples A 200,000 and 500,000 German Mark coin from 1923 A 500,000,000,000 (500 billion) Yugoslav dinar banknote circa 1993 the largest nominal value ever officially printed in Yugoslavia. 11-27 Quantity Theory MV = PY Velocity: the circulation rate of money Inflation is always and everywhere monetary phenomenon. Milton Friedman 11-28 %M + %V = %P + %Y Assume V = constant, so %V = 0 %M = %P + %Y %Y determined by investment, technology, etc. %M is proportional to %P Seignorage Growth in Money Supply Inflation 11-29 US Inflation and Money Growth 10 8 1970s 1910s Inflation % 6 1940s 1980s 4 1990s 2 1960s 1900s 1950s 0 1890s 1880s 1930s 1920s 1870s -2 -4 0 2 4 6 8 Money Supply Grow th (%) 10 12 11-30 UK Inflation and Money Growth 11-31 Cross-country Inflation and Money Growth, Long Run 11-32 Cross-country Inflation and Money Growth, Short Run 11-33 Summary Inflation Measures Costs Deflation Money Definitions Multiplier Seignorage and Inflation Tax Hyperinflation