WS 2006/07 1 U. van Suntum Konjunktur und Beschäftigung 7. Expectations and the Phillips Curve • Exogenous business cycle explanation • rational expectations • resulted from critique of Phillips curve • extreme results in theory • substantial impact on economic thought U. van Suntum KuB 6 1 U van Suntum, Lecture KuB 1
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WS 2006/07 1 U. van SuntumKonjunktur und Beschäftigung 7. Expectations and the Phillips Curve Exogenous business cycle explanation rational expectations.
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WS 2006/07 1 U. van Suntum Konjunktur und Beschäftigung
7. Expectations and the Phillips Curve
• Exogenous business cycle explanation
• rational expectations • resulted from critique of Phillips curve
• extreme results in theory
• substantial impact on economic thought
U. van Suntum KuB 6 1U van Suntum, Lecture KuB 1
WS 2006/07 2 U. van Suntum Konjunktur und Beschäftigung
Phillipscurve and Expectations
termedisturbanc u
level price expectedp
output mequilibriu Walras
)1(
e
*
*
real
erealreal
Y
up
ppbYY
up
pyy*)
b
e
ln*: versioncontinuousin
Robert E. Lucas jr.• born 1937
• Nobelprize 1995
U. van Suntum KuB 6 2
Lucas supply function:*)
U van Suntum, Lecture KuB 2
WS 2006/07 3 U. van Suntum Konjunktur und Beschäftigung
Business cycle modell with Lucas supply function
up
ppbYY
MvY
Y
Yp
gav
YpYMv
erealreal
nom
real
nom
tp
nomreal
)1()5(
)4(
)3(
1)2(
)1(
*
1
U. van Suntum KuB 6 3
ubY
pbYYp
up
ppbY
Yp
real
erealnom
ereal
nom
)1()6(
)1()5()3(
*
*
*
• With p = pe and u = 0 => Yreal = Yreal*
• p endogenous, dependent on pe
U van Suntum, Lecture KuB 3
WS 2006/07 4 U. van Suntum Konjunktur und Beschäftigung
Three versions of expectations:
a) static (Keynesian version ):
b) adaptive (monetaristic version):
c) rational (new classical version):
1)7( te ppa
11
e
e
1p
1α
)()7(
1
111
tptpep
eppp
ep
gpgg
ggggb
t
ttt
eY
ev
eM
ep
reale
eee ggggY
vMpc )7(
With it follows:
U. van Suntum KuB 6 4U van Suntum, Lecture KuB 4
WS 2006/07 5 U. van Suntum Konjunktur und Beschäftigung
Nine possible combinations with monetary policy (six are relevant):
Additional money supply
a) static expectations b) adaptive expectations
c) rational expectations
A) One off increase (prevailing)
Aa
B) Increase by constant rate in every period
Ba Bb
C) Increase by accelerating rate in every period
Cb Cc
=> Keynesian Phillipscurve
=> Monetaristic Phillipscurve
=> New classical Phillipscurve
U. van Suntum KuB 6 5U van Suntum, Lecture KuB 5
WS 2006/07 6 U. van Suntum Konjunktur und Beschäftigung
Additional money supply
a) static expectations b) adaptiv expectations
c) rational expectations
A) One-off increase (prevailing)
B) Increase by constant rate in every period
C) Increase by accelerating rate in every period
=> Keynesian Phillipscurve
=> Monetaristic Phillipscurve
=> New classical Phillipscurve
U. van Suntum KuB 6 6U van Suntum, Lecture KuB 6
WS 2006/07 7 U. van Suntum Konjunktur und Beschäftigung
Numerical example model Ab: one-off increase of M with adaptive expectations*)
Wachstumsrate M 0,00% Mo 800ALG* 80,00% y* 800Parameter a (v) 0,5 PP 1000Parameter b (y) 1adaptive Erwartungen: