2010_RL5 - EC 210 Revision Lectures Milan Lisicky...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: EC 210 Revision Lectures Milan Lisicky [email protected] May 11, 2010 1/15 1 inflation and monetary policy cost of inflation monetary policy 2 open economy gains from trade dynamic model with money - open economy 2/15 Cost of Inflation business cycle models give conditions when the government can use monetary policy to affect the path of real economy segmented access to bond markets rigid money wages rigid prices imperfect information about inflation in all these the economy exhibits the Phillips curve that permits inflation- output trade-off in the short-run there is no trade-off in the long run output returns to Y T and the price level is higher periods of inflation spur inflation expections why is it bad and what is the best thing for the gov’t to do? 3/15 Derivation of optimality conditions with nonzero expected inflation need to be more precise about consumption and labour supply before we introduced the cash-in-advance constraint: MRS c , c = 1 + r MRS l , c = w MRS l , l = MRS l , c MRS c , c MRS l , c = w (1+ r ) w = w w / (1+ r ) with the cash-in-advance constraint: MRS c , c = 1 + r MRS l , c = w (1+ R ) MRS l , l = MRS l , c MRS c , c MRS l , c = w w / (1+ r ) 1+ R 1+ R ≈ w w / (1+ r ) assume N s curve still upward sloping w.r.t. r new is only MRS l , c 4/15 Implications of higher inflation i e will increase 1 + R = (1 + r )(1 + i e ) ≈ 1 + r + i e intra-temporal decision is distorted: MRS l , c = w 1+( r + i e ) high inflation (...
View Full Document

Page1 / 15

2010_RL5 - EC 210 Revision Lectures Milan Lisicky...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online