Chapter 24

Chapter 24 - Money and Inflation: Evidence “~‘:>...

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Unformatted text preview: Money and Inflation: Evidence “~‘:> 0 Inflation is always and everywhere a monetary phenomenon Trails/m9) => 4‘ in? (W 0 Whenever a country's inflation rate is extremely high for a sustained period of time, its rate of money supply growth is aiso extremely high o Reduced-form evidence 2*, _ , ; , 3,, ,m . \ ,, (\2 “fl-'1 '1 'i " ’33: r_t_". ~ _ ' A“ a P "‘ ' 3'“: 0/ ----~‘ r‘ {-2111 \ ‘2 1' _.,~_ 1F» .pJ '7 {Jar‘X‘ik-B ‘ ii“ e i) “ git \ .r Q My“: LL‘ “a 43 |wfiu 5)? "3,“ 3m ELE .. 1.’ y ' 7- 4 , “ifrqua‘ L“; 1 ~ :5 ‘fV\D Camps: mm are? IT 3: {Jr ‘m a my au- ; ,vjk. Us ,_ «7-1 do 10/5/2010 n} {ffigzfinfll mini \ w a“ wa‘aQtJ gWV‘Q‘W ‘MQGWE Am 5? £3? oi‘ii‘w FIGURE 1 Money Supply and Price Level in the German Hyperinflation Fm Liweland Money Supply Index (mum) ICWCOfiDOfiOOflGD 1 ‘OBOfiDOflOQODO IOO,QU0.00G,OOO !O.C00.000.000 z 100,000,000 10.000000 $000900 10,000 _' LOW Pslne Laue! -' 100 " 500.000 w 7" m' " Albnegsusgply 1920 1921 1922 1923 1924 Source: Frank D. Graham, Exchange, Prices and Production in Hyperinflation: Germany, 1929-25 (Princeton, NJ: Princeton University Press, 1930), pp. 105—106. Views of Inflation a Money Growth * High money growth produces high inflation o Fiscal Policy — Persistent high inflation cannot be driven by fiscal policy alone a Supply Shocks — Supply-side phenomena cannot be the source of persistent high inflation r 0 Conclusion: always a monetary phenomenon 10/5/2010 10/5/2010 FIGURE 2 Response to a Continually Growing Money Supply . Aggregate DUKE-iv 15’": :39! l C ’ffif} t}j"“§“‘yfi£ price LEVEL P u. x; ; \;_ o- w Aggregate Output, Y FIGURE 3 ReSponse to a One-Shot Permanent Increase in Government Expenditure teas Aggregate . Price Level. P u Coir/3;:— y‘dl/‘gifiii I? R, l_: \J «fl»- A»; « muted on deterracaewafig rafter; “ . if “J t ; l , _ "Tl: Cw ‘0 "r {s‘u‘S'l'i‘w‘n‘é-fl mew $‘Jll.§-\i 10/5/2010 FIGURE 4 Response to a Supply L845 Aggregate _ A32 Price Level, P 1 P1» an P“; K“ . g u 5:“ I: “:3 vi) "AU":- ‘fl‘ V11 Y2: Aggregaie Output, Y WM”? WWW gopp‘au} Sandals? - a 5% . !§‘- 1,-- ‘5 w wine (Leafvirzv‘xumzi 0‘ in we? at» :2-‘ep€.»!<n«\ or \:f “972013 {NA/".36 coyfflfltécfiol ’1'? ’T‘ ‘< |: I?“ i,‘ r‘y-dgH-fl-i‘.-JFV # M?» f,;;)‘=-’"«':‘w1=,g GM 0‘ «A? 3'0 $32.33;; “v t” , 2:51 a"; Origins of Inflationary Monetary Policy 0 Costwpush inflation , - Cannot occur without monetary authorities pursuing an accommodating policy - Demand—pull inflation - Budget deficits — Can be the source only if the deficit is persistent and is financed by creating money rather than by issuing bonds 10/5/2010 Origins of Inflationary Monetary Policy (cont'd) 0 Two underlying reasons — Adherence of policymakers to a high employment target — Presence of persistent government budget deficits FIGURE 5 Cost-Push Inflation with an Activist Policy to Promote High Employment Aggregaie , Price Level, P 3 A84 A83 A82 14S} kg); 1.4 ~ '~ 2‘ J ‘- w J v WE is} p. . " .. figwx fl .v ‘90qu 10/5/2010 FIGURE 6 Demand-Pu}! Inflation: The Consequence of Setting Too Low an Unemployment Target Aggregate “gm Price Level, P A84 A33 _ A82 : My" .fi. . , Dem-Lani? a" 1253‘: falfit‘ iii-Vi“; ' n- potimfi yea-"zfl-‘fififré 0“ FRED uwfing V 53,, $3? « has; > V“ ,WG “mfg-5 mac‘s 19.5213?an Luflufififi 5? \\j gmfitg =7??? - ~5r\;\t€.\$ wmm comrmve “Erma we? {Hr-“TV ' FIGURE 7 Interest Rates and the Government Budget Deficit : get =AMB Jr 13% Price of Bonds, P Detzww =35? t -M\¥\EP man is 'm NB or “75> U {3) . t7 ‘g K 293%»; t ‘ . J3 anvw ‘t’ ‘= “‘69 x a“ .. , “Dagetoom, or 1.2M , t 4:: mm: {L} w; to“. w (Mr V. -\ U -J cm goat MS _, it; WE ,-, . wwwggan kg aski- ‘iiv v‘fiafluk‘j‘xi +0 Ea“ ‘Oa‘mcéxz - é {2:3,}9", , ' JAM:JZ_) '1‘,‘ \KJ/ ‘ . f‘ . ' 2 ‘. 7 F md\ (a, 5:2“ wmg a)? a“)? nan-magi)" gm gfliyglfi "j.\ ‘n, J. r 5 'm x "j - i-rv¥\.z).v~+¥ \w%,\;<,._ ._ aé‘v‘i i :4»? ’j ""--~: * ‘ V'fmwj i '4 Wm, FIGURE 8 Inflation ahd Money Growth, 1960—2008 Inflation Rate. Money Growth Rate 9%) 16 14 Money Growth (M1) two Years Earlier 12 5% Inflation Rate 10 ._ fifimmseauummmmm - imam WMflMRMmflfikMfiamd-Bk WWEgmwwuuuuuuaueuwummmm“ _ am» 5:: .A . _‘ fl‘gsymuwm *immmoemmmm Wmvmsimmmmmmvmmummmvnimvmu giggggfiwmwwwwwmwu nnwnww fimwmmhmmwm 1980 1934 1988 1972 1975 1986 1984 1988 1992 1996 2000 2004 2008 Source: Economic Report of the President; www.federairesewe.gov/releasesih6!histfhfihistl .txt. FIGURE 9 Government Debt—to— GDP Ratio, 1960—2008 oem (as of GDP) so 50 4o 30 20 0 1960 1965 3970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Economic Report of the President. 10/5/2010 10/5/2010 FIGURE 10 Unemployment and the Natural Rate of Unemployment, 1960—2008 Umpfcymem Rate {%) 10 Maggi {late of £3312me 1960 1955 1970 1975 1930 1985 1990 1995 2000 2006 2010 Sources: Economic Report of the President and Congressional Budget Office. “ at} V ‘ 44M“? iota $5.1 ,thgriflQa €391). J Nofloléeirg’ngmoflfi {fi’io‘rec,firctwettiylgulwg, $29556 Myst; iifiliiliiv we a A . r 1 Mas-5% “7.5;: l anti as at“). The Discretionary/Nondiscretionary Policy Debate 0 Advocates of discretionary policy regard the self—correcting mechanism as slow _ «A c; 0 Policy lags slow activist policy [bad lilo-r dtgmmwafl a Gm» '1“: J lax? - Data lag L-hme, +0 Cong/Cs; Wegg‘} - Recognition lag Lem to Sofa, _ _ - Legislative lag d _ ' fiwgflgflj Impleinentataon lag ‘ “495— EffeCtiVeness lag meayra :‘f‘iz‘l s.» : if”, ,6 « SANDY"? ‘ -ggfie slaw: We; ' . “15;, Erie? S(xv-HS if“ (1‘: Ear-31 g ; , , ’T) h u, \‘Q _‘ K {my} — Rseome Wt? eon/ma, fig” 0%” -‘ri§{:5‘51 €25§UJEEiCii-"‘L:fi‘rru,§ mm? is Paééfidl but £533; to was; er waive? (:36 meg “gaitfgéifi W {Demo-c3 ’2. M ' in it“: ‘2‘ I mores-gm \JCE&*?E”1V=“§ m \§ {v i9 The Discretionary/Nondiscretionary Policy Debate (cont'd) o Advocates of nondiscretionary policy beiieve government should not get inveived — Discretionary poiicy produces volatility in both the price level and output D ‘6'“: L GHQ rm 3 £15 ; Mommeg — ii‘ME‘ => {m =9 S" _.m _ ~. ‘2 "‘ FIGURE 11 The Choice Between Discretionary and Nondiscretionary PoEicy Aggregate ‘ LRAS _ ,4 Price Lave; P . Yr Y2 Aggregate Output, Y 10/5/2010 Expectations and the Discretionary/Nondiscretionary Debate - If expectations about policy matter, discretionary policy with high employment targets may lead to inflation o Nondiscretionary policy may prevent inflation and discourage leftward shifts in P‘jx short-run aggregate supply that lead to w excessive unemployment — Must be credible \ V“ L/ t o Constant-money—growth-rate rule .«MY‘ K‘fik’g gétf‘bg‘m ,_fi 1 . -- ‘5’? 4 - - . *erfi to Crate-“w twat-e. 3 ‘ ‘ ’ ,9 :a -< . ¥DVC+§3¢4GH§ achkiarkég:iag 3“ 1 10 ...
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This note was uploaded on 02/21/2011 for the course ECON 2035 taught by Professor Stahl during the Spring '08 term at LSU.

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Chapter 24 - Money and Inflation: Evidence “~‘:&amp;gt;...

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