JohnRyding2010

JohnRyding2010 - MacroeconomicDriversofFinancial Markets or

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Macroeconomic Drivers of Financial Markets or Life as a Markets’ Economist July 23, 2010 hn Ryding John Ryding Chief Economist 212 584 3881 [email protected] 1
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acroeconomics: A Brief History Macroeconomics: A Brief History Macroeconomics came of age as a subject in 1936 with the publication of John aynard Keynes’ General Theory of Employment Interest and Money Maynard Keynes General Theory of Employment, Interest and Money. Aggregate demand failure replaced Say’s Law that “Supply creates its own demand.” Keynes’ theory was bastardized by Hicks and Hansen into the IS LM amework From a policy perspective this approach emphasized demand framework. From a policy perspective, this approach emphasized demand management and enjoyed its heyday in 1971 when Nixon declared “We are all Keynesians now.” The theory of inflation that was grafted onto the IS LM model was the Phillips urve (first published in 1958 by ProfessorAW Phillips) Curve (first published in 1958 by Professor A.W. Phillips). The late 1960s and 1970s saw the breakdown of the Phillips Curve (stagflation) and the Monetarist counter revolution led by Milton Friedman. “Inflation is always and everywhere a monetary phenomenon.” Rational Expectations approach of Lucas was added to the monetarist model. No role in this approach for aggregate demand management. What are we to make of all this given the experience of the last two years? 2
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e Standard Model The Standard Model GDP = C + I + G + X–M GDP Identity C = C(Y T, NW, r) Consumption Function (including wealth) I = I( GDP, r) MEI schedule and accelerator X = X($, WT) Export equation M = M($, GDP) Import equation Y = W.E + σ . Π Income equation E = E(GDP, W/P) Employment depends on GDP and real wages U = LF – EU n e m p loyment a residual p = P(U U*) Phillips Curve r = f(M d –M s )M here is money not imports M d = M(GDP, r) Liquidity Preference M s = M(BR) Fractional banking multiplies bank reserves BR = BR(r, r*) Fed balance sheet r(p * U *) ylor Rule r* = r(p p*, U U*) Taylor Rule 3
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acroeconomics: My View Macroeconomics: My View In normal times, the economy operates within a corridor around full mployment Provided monetary policy is close to neutral movements in employment. Provided monetary policy is close to neutral, movements in long term interest rates will tend to keep savings and investment in equilibrium. In general, government policies are more destabilizing than free market rces Monetary policy is a major source of instability and the Federal forces. Monetary policy is a major source of instability and the Federal Reserve act demands the impossible of the Fed (to maintain both maximum sustainable growth and price stability). Inflation is a monetary phenomenon but the transmission mechanism is not ell understood and can vary over time well understood and can vary over time.
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This note was uploaded on 10/16/2010 for the course IEOR 4729 taught by Professor Leotilman during the Summer '10 term at Columbia.

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JohnRyding2010 - MacroeconomicDriversofFinancial Markets or

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