Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Exchange rate wikipedia , lookup
Balance of payments wikipedia , lookup
Economic bubble wikipedia , lookup
Monetary policy wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Fiscal multiplier wikipedia , lookup
Business cycle wikipedia , lookup
Nominal rigidity wikipedia , lookup
Macroeconomic Adjustment and Structural Reform An Overview Thorvaldur Gylfason Outline Microeconomics of supply and demand Examples from agriculture and computers Macroeconomics of aggregate supply and demand Policy application: Macroeconomic adjustment through aggregate demand management Monetary and fiscal policy; exchange rates Structural reforms on the supply side Introduction Economics: Adam Smith 1776 Microeconomics: Alfred Marshall 1890 Allocation of scarce resources among alternative uses Determination of prices by demand and supply in markets Different market structures Competition, oligopoly, monopoly Macroeconomics John Maynard Keynes 1936 One of the chief architects of the IMF Structure and functioning of national and international economy Determination of national income, economic growth, unemployment, inflation, exchange rates, external debt, etc. Grew out of the Great Depression 1929-39 Microeconomics not well suited to deal with macroeconomic problems Microeconomics in action Price Supply P* Equilibrium Demand Q* Quantity Excess demand Price Supply Equilibrium Excess demand Demand Quantity Excess supply Price Excess supply Supply Equilibrium Demand Quantity Economic models Exogenous variables Model Endogenous variables Change in technology or weather Demand for and supply of food Price and quantity of food Application to agriculture Price Supply (elastic) Equilibrium Demand (inelastic) Quantity Application to agriculture Price Supply (elastic) Income of farmers Demand (inelastic) Quantity Application to agriculture Price Supply before A Technological progress Supply after B Demand (inelastic) Quantity Application to agriculture Price Supply before A Technological progress Supply after B Income of farmers after technical change Demand (inelastic) Quantity The farm problem No coincidence that agriculture has economic problems all over the the world Technological progress lowers production costs and prices without inducing a significant increase in food consumption because food demand is constrained by people’s biological need for a fixed number of calories per day Therefore, farm incomes fall! Computers: Another story Price Supply Demand (elastic) Quantity Computers: Another story Price Supply before A Technological progress B Supply after Demand (elastic) Quantity Computers: Another story Price Supply before Producers and consumers both gain from technological progress Supply after B A Loss Demand (elastic) Gain Quantity Macroeconomics in action: Aggregate supply Price level Aggregate supply An increase in prices induces producers to produce more, so that aggregate supply increases GNP Aggregate demand Price level An increase in prices induces consumers to buy less, so that aggregate demand decreases Aggregate demand GNP Macroeconomic equilibrium Price level Aggregate supply Equilibrium P* Aggregate demand Y* GNP Excess demand Price level Aggregate supply Equilibrium Excess demand Excess demand drives prices up, as in Eastern Europe in the 1990s Aggregate demand GNP Excess supply Price level Excess supply Aggregate supply Equilibrium Excess supply drives prices down, as in America in the 1930s Aggregate demand GNP Experiment: Export boom Price level AS AD GNP Export boom Price level AS B A Exports increase AD’ AD GNP Export boom Price level AS B A Excess demand drives prices up C AD’ AD GNP Export boom Price level AS B As the price level rises, so does GNP along the upward-sloping AS curve A AD’ AD GNP Comments on experiment An export boom stimulates aggregate demand because Y = C + I + G + X - Z Therefore, all other comparable boosts to aggregate demand will have same effect: Consumption C (e.g., through lower taxes) Investment I (e.g., via lower interest rates) Government spending G GNP will rise when AD increases as long as AS curve slopes up An interpretation Exogenous variables Export boom or investment boom Model Aggregate demand and supply Endogenous variables Price level and GNP Economic policy Economic policy instruments Exogenous variables Fiscal policy: Government spending, taxes Monetary policy: Money, credit, interest rates Exchange rate policy: Exchange rate (if fixed) Economic objectives or targets Endogenous variables GNP level or growth Price level or inflation Employment, unemployment BOP, exchange rate (if flexible), external debt Aims of economic policy Apply policy instruments to attain given economic objectives E.g., by conducting monetary and fiscal policy in order to strengthen the BOP Key to financial programming Not only crisis management in short run Also, important to conduct policy so as to foster rapid, sustainable economic growth Key to economic and social prosperity Macroeconomic adjustment and structural reform Begin with aggregate demand Show how it depends on G, t, M, e Then add aggregate supply Show how it depends on structural reforms Then add balance of payments Then make policy experiments Assess the effects of policy measures on macroeconomic outcomes Aggregate demand Y = C + I + G + X – Z C = c(Y-T) = (1-s)(1-t)Y Where s = saving rate and t = tax rate I = k(M/P) Through r (real interest rate) G = exogenous X = aY* – bR Z = mY + cR Where R = eP/P* (real exchange rate) Aggregate demand Y = (1-s)(1-t)Y + k(M/P) + G + (aY* – b(eP/P*)) – (mY + c(eP/P*)) Which means: Y = F(P; M, G, t, e; Y*, P*) – + + – – + + Aggregate demand schedule slopes down Via real balances and the real exchange rate ... and shifts in response to changes in exogenous variables, including policy Aggregate supply Y = F(N) N = N(W/P) Labor demand varies inversely with real wages Y = F(W/P) – or, equivalently, Y = F(P; W) + – Aggregate supply schedule slopes up Through real wages ... and shifts in response to changes in exogenous variables, including wages Aggregate supply Y W/P Production function B A An increase in the real wage reduces employment and output. A B Labor demand N N Macroeconomic equilibrium Price level AS W up M up; G up; t down; e down AD GNP Monetary or fiscal expansion Price level AS B A An increase in M or G or a decrease in t increases both Y and P for given W. AD’ M up; G up; t down AD GNP An increase in wages Price level AS’ AS W up B An increase in W increases P, but reduces Y. An increase in the price of imported oil has the same effect. A AD GNP Devaluation Price level B W up A When e decreases, W AS’ often also rises, so AS that P increases, but Y may either rise or fall. Even if W stays put, AS will shift to the left AD’ as devaluation raises e down the price of oil and other imported inputs. AD GNP Effects of demand management and supply shocks: Overview G t M e W - - Y + - + P + - + (?) - + Balance of payments B = X – Z + F X = aY* – bR Z = mY + cR R = eP/P* F = exogenous B = F(Y, P; e, F; Y*, P*) – – – + + + To reduce deficit in the balance of payments Must apply monetary or fiscal restraint to decrease Y or P or decrease e (devaluation) or increase F (capital inflow). Balance of payments adjustment Suppose, at A, there is a deficit in the balance of payments (B 0) Price level Can offset decrease in aggregate demand by increasing e or F A AS e down, F up M or G down, t up AD Then, to reduce deficit, must reduce M or G or raise t to reduce demand (shift AD left) End result is still point A, but now with balance of payments equilibrium (B = 0). Level of GNP is unchanged, but its composition has changed. GNP Macroeconomic adjustment and structural reform Start, at A, with a deficit in the balance of payments (B 0) Price level Stimulate supply side by liberalization, stabilization, privatization, etc. AS AS’ AD’ A E M or G down, t up AD Then, to reduce deficit, try to stimulate supply (shift AS right) in addition to reducing demand End result is point E with balance of payments equilibrium (B = 0). Level of GNP is unchanged, but its composition has changed. Price level is lower. GNP Conclusion These slides will be posted on my website: www.hi.is/~gylfason The essence of financial programming is to find the right combination of monetary, fiscal, and structural policy measures that improve the balance of payments ... ... without damaging other important macroeconomic variables, including output and employment. Theory and experience indicate that such measures are generally good for growth.