Lecture_24_2010 - Intermediate Macroeconomics Bruce Preston...

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Intermediate Macroeconomics Bruce Preston April 22, 2010
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Today & Zero lower bound on nominal interest rates & De&ation, lessons from Japan & Next week: Open-economy Issues & Chapters 16 and 17 & Global Savings Glut: Bernanke
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2 CHAPTER 14 The Global Financial Crisis and the Short-Run Model
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One Model Interpretation of the Crisis & Changes in perceive risk appear central & Assume the interest rate in equilibrium is determined by R t = R ff t + & p & R t is the Fed Funds Rate & & p a risk premium &shock±
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One Model Interpretation of the Crisis II & IS and MP equatitons almost unchanged: ~ Y t = & a ± & b ( R t ± & r ) R ff t = & r + & m ( & t ± & & ) & The Monetary Policy Rule can be written as R t = & p + & r + & m ( & t ± & & ) giving AD curve ~ Y t = & a ± & b & p ± & b ( R t ± & r ) & Increase in & p downward shift in AD curve
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3 CHAPTER 14 The Global Financial Crisis and the Short-Run Model
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4 CHAPTER 14 The Global Financial Crisis and the Short-Run Model
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5 CHAPTER 14 The Global Financial Crisis and the Short-Run Model
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Algebraic Interpretation of In&ation Targeting & Consider the limit & m ! 1 in & m ± 1 R t = & m ± 1 & r + ( & t ± & & ) which gives & t = & & & Central Bank must keep in&ation equal to target at all times & Called ±targeting rule². Determines systematic relationship that the Fed must implement. & But what interest rate implements this in&ation rate? How does the Central Bank choose R t ?
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Algebraic Interpretation II & Aggregate supply is determined by & t = & e t + v ~ Y t + & o & Suppose CB has credibility: & e t = & & . Then if & t = & & in every period ~ Y t = ± & o v & The IS curve requires ~ Y t = & a ± & b ( R t ± & r )
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& Hence ± & o v = & a ± & b ( R t ± & r ) Solving for R t yields R t = & r + & o + v & a v & b & Interpretation?
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In&ation Targeting In Practice & In&ation not given exclusive consideration in the short run & Care also about the real economy & The degree of concern given to the real economy could in part be captured by the size of & m in R t = & r + & m ( & t ± & & ) & Rule can also have explicit dependence on the real economy R t = & r + & m ( & t ± & ) + & m & h ~ Y t where & h > 0 determines the relative weight given to output stabilization ² Taylor Rule
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In&ation Targeting In Practice II & Consider the limit & m ! 1 in & m ± 1 R t = & m
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This note was uploaded on 02/27/2011 for the course ECONOMICS 201 taught by Professor P during the Spring '11 term at Columbia College.

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Lecture_24_2010 - Intermediate Macroeconomics Bruce Preston...

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