principles of economics macroeconomics inflation, unemployment, output, and prices
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Principles of Economics Macroeconomics Inflation, Unemployment, Output, and Prices. J. Bradford DeLong U.C. Berkeley. Interest Rates and Spending. Y = μ[c 0 + (G - c y T) + (c w W + I + X)(r)]; r: the real interest rate: - PowerPoint PPT PresentationTRANSCRIPT
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Principles of Economics
Macroeconomics
Inflation, Unemployment,
Output, and Prices
J. Bradford DeLongU.C. Berkeley
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Interest Rates and Spending
• Y = μ[c0 + (G - cyT) + (cwW + I + X)(r)]; r: the real interest rate:
• r = i (the current interest rate) + E(Δi) (expected change in interest rates) + ρ (the risk premium) - E(π) (expected inflation)
• Rule of thumb: in the U.S. today, boost the (risky) real interest rate r by 1%-point: reduces exports by $50 billion/year; reduces household consumption spending by $50 billion/year; and reduces business investment spending by $200 billion/year
• The “Liquidity Trap”
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Aggregate Supply• Where is the
aggregate supply curve?
• Full employment
• Last year’s prices
• Expected inflation
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Suppose We Were to Slip a Derivative?
• In some ways a better diagram to draw—we aren’t continually having to draw our curves higher and higher on the graph…
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The Phillips Curve• When unemployment
is high AD is to the left—and we should see inflation less than expected inflation plus supply shocks
• When unemployment is low AD is to the right—and we should see inflation less than expected inflation plus supply shocks
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The Phillips Curve II
• When unemployment rises, inflation tends to fall
• A relationship called the “Phillips Curve”
• But not something you can count on…
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The Phillips Curve III
• And what inflation rate corresponds to a given unemployment rate has varied a lot over the past half century…
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The Phillips Curve IV
• And what inflation rate corresponds to a given unemployment rate has varied a lot over the past half century…
• The “new economy” of the 1960s…
• The 1973 oil shock…
• Whip Inflation Now!
• The Iranian Revolution
• The “Great Moderation”
• The Volcker Disinflation
• Opportunistic Disinflation
• Greenspan Stability
• Bernanke
• Inflation Expectations and supply shocks
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What Drives Inflation Expectations?
• Last year’s inflation
• Economic slack
• Jawboning?
• What’s just happened to gasoline prices
• Oil shocks more generally
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Slipping a Derivative
• In some ways a better diagram to draw—we aren’t continually having to draw our curves higher and higher on the graph…
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Okun’s Law• Production
(relative to the full-employment “potential output” level)
• Unemployment (relative to the natural rate)
• A 2-to-1 relationship
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Suppose We Were to Substitute Unemployment
for Production?
• This should move up or down depending on how expected inflation changes
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And Suppose We Were Willing to Assume That Inflation
Expectations Were Adaptive?
• Then we slip another
• derivative
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How Well Does This Do?
• Since 2000 (black) there has been very little change in inflation
• In the 1990s periods of unemployment < 5% see inflation creep up; periods of unemployment > 7% see inflation ebb
• In the 1980s (green) we see substantial deceleration of inflation when unemployment > 7%
• The 1970s (red) are all over the place
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Breaks Down in the 1970s and Post-2009
• In the 1970s big supply shocks shift expected inflation and disrupt the “adaptive” Phillips Curve
• After 2009 inflation does not fall (much) even when unemployment is very high
• In between we have:
• π = -β(u-u*) + E(π)
• π = -β(u-u*) + π-1
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Will the “Adaptive” Phillips Curve Come
Back?• Who knows?
• Supply shocks
• Adaptive expectations
• Static expectations (expectations “well anchored”)
• Inflation lower bound
• “Rational” expectations