325_Lecture18_April6

325_Lecture18_April6 - MONEY AND BONDS APRIL 6, 2011...

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1 M ONEY AND B ONDS A PRIL 6, 2011 April 6, 2011 2 I S M ONETARY P OLICY N EUTRAL? Introduction ± An enduring question in macroeconomics: does monetary policy have any important effects on the real (i.e, real GDP, consumption, etc) economy? ± Definition : Money (and hence monetary policy) is neutral if changes in the money supply (i.e., changes in monetary policy) have no effect on the real economy ± Monetary policy is non-neutral if it does have effects on the real economy ± New Keynesian view: money is non-neutral (because prices are rigid/sticky, often for long periods of time) ± RBC view: money is neutral (because prices are not rigid/sticky in any important way) ± To seriously study neutrality issue, need to finally explicitly think about money and monetary policy ± It’s only been in the background of the analysis so far…
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2 April 6, 2011 3 T HE R OLES OF M ONEY Macro Fundamentals ± The roles played by money ± Medium of exchange ± Eases double-coincidence of wants problem ± Unit of account ± A common “language” for all prices to be quoted in ± Store of value ± Apples will perish in short amount of time, dollar bills won’t ± How to conceptually “model” money a surprisingly hard problem ± Much more difficult than, i.e., “consumption-leisure framework” or “consumption-savings framework” ± How to formally (mathematically) represent these roles of money? ± A shortcut: suppose money directly yields utility ± Period- t utility function ± Money-in-the-utility-function (MIU) formulation ± IMPORTANT: It’s not M t in the utility function, but rather M t / P t , t t t M c P u §· ¨¸ ©¹ April 6, 2011 4 R EAL M ONEY B ALANCES ± M t / P t a key variable for macroeconomic analysis ± Unit Analysis (i.e., analyze algebraic units of variables) ± Units( M t ) = $ ± Units( P t ) = $/unit of consumption ± Units( M t / P t ) = $u n i t o f c o n s u m p t i o n $ $ $ unit of consumption unit of consumption ±
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3 April 6, 2011 5 R EAL M ONEY B ALANCES Macro Fundamentals ± M t / P t a key variable for macroeconomic analysis ± Unit Analysis (i.e., analyze algebraic units of variables) ± Units( M t ) = $ ± Units( P t ) = $/unit of consumption ± Units( M t / P t ) = ± Utility (composite of medium of exchange, unit of account, store of value) depends on real money ( M / P ), not nominal money ( M) ± Measures the purchasing power of (nominal) money holdings… ± …which is presumably what people most care about ± M t and P t can potentially grow at different rates ± In which case real money balances change from one period to the next $u n i t o f c o n s u m p t i o n $ $ $ unit of consumption unit of consumption ± April 6, 2011 6 M ONEY M ARKETS AND B OND M ARKETS ± A prerequisite for analyzing monetary policy: understanding bonds and bond markets ± Bond markets and money markets tightly linked to each other ± What is a “bond?”
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This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.

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325_Lecture18_April6 - MONEY AND BONDS APRIL 6, 2011...

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