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Managing Macroeconomic Fluctuations 1
Managing Economic Fluctuations
-Keynesian macro: - -term nominal interest rates. - - – . -
- .
– - -
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Managing Macroeconomic Fluctuations 2
Review: New Keynesian Model
-run macroeconomics: - π = γ (Y −Y
P)+π e
+ ρ γ > 0 π
e ρ .
Y = Y d (r,...) = Y − d ⋅r r = r + λ ⋅π λ > 0 .
-run macroeconomics: -
Y = Y P
π e = π
ρ = 0 -
r = r * real rate
Y d (r,...) = Y P
- set
r = r *−λ ⋅π *
π *
-
Y P.
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Managing Macroeconomic Fluctuations 3
Part 1: Disturbances and their effects:
Aggregate Demand Shock & No Response
- π↓ ↓.
- - π πe
-
logic
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Managing Macroeconomic Fluctuations 4
Temporary Aggregate Supply Shock & No response
ations.
t
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Managing Macroeconomic Fluctuations 5
Permanent Aggregate Supply Shock & No Response
. normal economic
-
.
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Managing Macroeconomic Fluctuations 6
Part 2: Disturbances and policy responses – with focus on monetary policy:
Aggregate Demand Shock with Monetary Response
i↓ ↓ -
How does the Fed know
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Managing Macroeconomic Fluctuations 7
Temporary Supply Shock: Policy Options
1. Stabilize inflation 2. Stabilize output ↑ ↑ ↓ ↓
es out.
- must - .
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Managing Macroeconomic Fluctuations 8
Permanent Supply Shock: Policy Options
1. Stabilize inflation 2. Stabilize output ↑ ↑ ↓ ↓
. Accelerating inflation
- - – - Demand-Pull Inflation versus Cost-Push inflation
?
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Managing Macroeconomic Fluctuations 9
Demand-Pull Inflation
.
–
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Managing Macroeconomic Fluctuations 10
Cost-Push Inflation
—
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Managing Macroeconomic Fluctuations 11
Why shifts in LRAS create complications:
Information: How much do we know about shocks?
π π : - π - π π
to monetary to -
s: only interest rates - ½-
- -– in
not – - From i
. - From u Disagreement about LRAS is a source of legitimate policy disputes.
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Managing Macroeconomic Fluctuations 12
Output and Unemployment: Okun’s Law
-
U .
U >U ⇔Y < Y P -
Y P - :
U −U ≈ − 12 Y−Y P
Y P( ) = − 12Y P (Y −Y P )
ó
:
=> Information about potential output is quite imperfect. -
U
Y P as constants –
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Managing Macroeconomic Fluctuations 13
Application: U.S. Inflation 1965-1982 - -
Question: What do we know about the
natural rate of unemployment?
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Managing Macroeconomic Fluctuations 14
Updated Chart: August 2017
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Managing Macroeconomic Fluctuations 15
More on: why shifts in LRAS create complications
Linkages between Supply and Demand
- insig -
-
- conomics – - - shocks - dynamic adjustment processes -run
–
-
-
-
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Managing Macroeconomic Fluctuations 16
Lessons about Stabilization Policy . -
can - - lags
- -
cannot . - y- .
3 - Inflation is always and everywhere a monetary phenomenon. -
mostly metimes
When expectations matter, speculation about policy shifts can become a separate
source of shocks uncertainty
uncertainty
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Managing Macroeconomic Fluctuations 17
Guide to Problem Solving – Systematic Approach
- - π
- - - .
.
1. Monetary: e.g.
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Managing Macroeconomic Fluctuations 18
Examples from U.S. History:
Negative Supply Shocks: 1973-75, 1978-80 Oil Shocks
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Managing Macroeconomic Fluctuations 19
Examples from U.S. History:
Paul Volcker’s Disinflation: 1980-86
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Managing Macroeconomic Fluctuations 20
Examples from U.S. History #3:
Positive Supply Shocks: 1995-1999 -1994
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Managing Macroeconomic Fluctuations 21
Examples from U.S. History :
Negative Demand Shocks in 2001-2004
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Managing Macroeconomic Fluctuations 22
Examples from U.S. History:
Negative Shocks and the 2007-2009 Financial Crisis
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Managing Macroeconomic Fluctuations 23
China in 2007-2009: Demand Shock Only
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Managing Macroeconomic Fluctuations 24
The Taylor Rule
- - – - - –
–
- -
- - Keynesi