Lecture 13-Inflation and unemployment.pdf

# Lecture 13-Inflation and unemployment.pdf - 30-Jan-18...

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30-Jan-18 1 MACROECONOMICS LECTURE 13 INFLATION AND UNEMPLOYMENT: NEW KEYNESIANS VS POST- KEYNESIANS CONTENTS OF THE LECTURE 1. The Phillips curve and the NAIRU 2. The New Keynesian NAIRU framework 3. The post-Keynesian NAIRU framework 4. New Keynesians vs post-Keynesians CONTENTS OF THE LECTURE 1. The Phillips curve and the NAIRU 2. The New Keynesian NAIRU framework 3. The post-Keynesian NAIRU framework 4. New Keynesians vs post-Keynesians

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30-Jan-18 2 1. THE PHILLIPS CURVE AND THE NAIRU 4 Phillips curve (see Lecture 16): u a z m e ) ( AS curve (see Lecture 17 and Tutorial 17): z a LF Y a a p m p e 2 1 0 ) 1 ( 1 e p p e z a a a m a LF Y n 2 1 0 1 1 1 Natural level of output: a z m u n Natural rate of unemployment: 1. THE PHILLIPS CURVE AND THE NAIRU 5 u a z m ) ( 1 Suppose that the expected rate of inflation is well approximated by the last year’s inflation rate: a z m NAIRU 1 e 1 The Phillips curve becomes: NAIRU is the Non-Accelerating Inflation Rate of Unemployment. When actual unemployment<NAIRU, inflation increases. When actual unemployment>NAIRU, inflation declines. 1. THE PHILLIPS CURVE AND THE NAIRU The main ways through which NAIRU can decline are the following: (1) Institutional changes that reduce wage claims (and hence the parameter z ) : These include (i) the reduction in minimum wages, (ii) the reduction in unemployment benefits, (iii) changes in legislation that weaken labour unions and reduce employment protection and (iv) changes that increase part-time job contracts. These policies are often called as ‘labour market flexibility’ policies and became very popular in the 1990s and the 2000s. (2) Policies that reduce profit claims (and hence the parameter m ) : These include any type of policy that increases product market competition and reduces
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