macroeconomics ii - cerge-eihome.cerge-ei.cz/tlichard/teaching/macroii/l03handout.pdf ·...

Empirics of business cyclesAggregate Demand

Aggregate SupplyStabilization Policy

Conclusion

Macroeconomics IILecture 3: Intro to Economic Fluctuations

Tomas Lichard

IES (Summer 2017/2018)

Tomas Lichard Macroeconomics II



Conclusion

Long run vs. short run




Conclusion

Long run vs. short run

When we talk about long run and short run inmacroeconomics, we usually don’t refer to a precise timelength

They differ in the behavior of pricesin the long run:

prices are flexible and nominal variables (inflation, nominalinterest rate) do not affect real variables (RGDP, real interestrate)money supply is irrelevant when determining real variables(monetary neutrality)

in the short run:

nominal variables matter, because prices are not flexiblee.g. reduction in money supply leads to decrease in RGDPgrowth and higher unemployment




Conclusion

GDP & Unemployment Rate




Conclusion

GDP & Unemployment Rate II

Okun’s law - relationship between GDP growth rate andchange in unemployment rate:

-4-2

02

4g_

RG

DP

-1 0 1 2d_UR

n = 279 RMSE = .6995406

g_RGDP = .78427 - 1.6643 d_UR R2 = 45.9%




Conclusion

Okun’s law in CR

1994

1995

1996

19971998

1999

2000

2001

2002

2003

2004

20052006

2007

2008

2009

20102011

2012

−5

05

10

Gro

wth

of R

GD

P (

%)

−2 −1 0 1 2Change in unemployment rate (pp)

n = 19 RMSE = 2.2520943

growth_GDP = 2.9424 − 1.817 dUR R2 = 44.4%

CSO data




Conclusion

International comparisonNote: Authors here use the inverse relationship! (dUR on the left, dRGDP on the right)

Source: Ball et al. (2013)


http://www.nber.org/papers/w18668



Conclusion

Consumption & investment

-30

-20

-10

0

10

20

30

40

50

60

70

1950 1960 1970 1980 1990 2000 2010

ShadedareasindicateUSrecessions-2015research.stlouisfed.org

RealGrossPrivateDomesticInvestmentGrossDomesticProductbyExpenditureinConstantPrices:PrivateFinalConsumptionExpenditurefortheUnitedStates©

(PercentChangefrom

QuarterOneYearAgo),

(PercentChangefrom

YearAgo)




Conclusion

Leading economic indicators

Wall Street indexes predicted nine out of the last fiverecessions

– Paul Samuelson

Policy-makers like to know in advance if a recession is coming,so they try to look for signs of a future GDP downturn inother data:

Average workweek of production workers in manufacturing;Average initial weekly claims for unemployment insurance;New orders for consumer goods and materials, adjusted forinflation;New orders for nondefense capital goods;Index of supplier deliveries;




Conclusion

Leading economic indicators

Wall Street indexes predicted nine out of the last fiverecessions

– Paul Samuelson

Policy-makers like to know in advance if a recession is coming,so they try to look for signs of a future GDP downturn inother data:

New building permits issued;Index of stock prices;Money supply (M2), adjusted for inflation;Interest rate spread, yield curves;Index of consumer expectations.




Conclusion

Yield curve




Conclusion

Leading economic indicators — CR

Source: OECD Composite Leading Indicators, Country reviews




Conclusion

Why are prices sticky?

Some causes of sticky prices (Percentage of managers whoagree with the explanation according to Blinder, 1994)

Coordination failure: firms wait for other firms to increaseprices (60.6%);Lags with cost-based pricing (55.5%);Delivery lags (54.8%);Implicit contracts (50.4%);Nominal contracts (35.7%);Cost of price adjustment (30%);Procyclical elasticity (29.7%).




Conclusion

What is AD?

Relationship between the quantity of output demanded andthe aggregate price level;

It is not analogous to demand for single good!

In the short run, it influences production;

Recall the quantity equation:

MV = PY ,

orM

P=

(M

P

)d

= kY ,

leading to a downward sloping AD curve

Economic intuition?




Conclusion

What is AS

Relationship between the quantity of goods and servicessupplied and the price level

Recall that in the long run output does not depend on theprice level, it is determined by amount of labor, capital andtechnology:

Y = F(K , L

)= Y

However, in the short run it depends on the price level




Conclusion

Demand shocks

Shocks: exogenous events shifting AD or AS

Example of a demand shock: expansion of credit cards




Conclusion

Supply shocks

They alter the costs for firms, and by that prices - price shocks

e.g. drought, oil cartels, unions, environmental laws areexamples of what can cause a price shock




Conclusion

Accommodating a shock

Imagine an adverse supply shock, how can a CB react?




Conclusion

Case study: oil shocks




Conclusion

Case study: Velde (2009)

Francois R. Velde: “Chronicles of a Deflation Unforetold,”.(JPE 2009)

In 18th century, French government assigned nominal value toeach coin by a decree (coins were without markings)

In 1724, French government/king probably wanted todecrease prices in the economy, it lowered each coin’s value by45% (in three steps)

this was effectively a decrease in money supply

In 1726 the policy was reversed and coins were declared tohave 25% more value




Conclusion





Conclusion


In conclusion, prices took very long to fall, and they did notfall by the full 45%

the only market that adapted quickly was the foreign exchangemarket

Nominal wages did not react at all =⇒ real wages increased

Interest rate increased,

Industrial output dropped by 30%

After the reversal of the policy, prices and output reboundedrelatively quickly




Conclusion

Recall that...

1 We covered introduction to business cycles: they arefluctuations of the economy around long-term trend

2 In the short run, prices are sticky

3 Aggregate demand is a relationship between demanded outputand the price level

it is influenced by money velocityin the short run, AD may influence aggregate output

4 Aggregate supply is a relationship between supplied outputand the price level

5 Shocks are exogenous shifting of AD (demand shock) or AS(supply/price shock) curve


macroeconomics ii - cerge-eihome.cerge-ei.cz/tlichard/teaching/macroii/l03handout.pdf ·...

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