Econ+102+lecture+19%2C+3-22-12+-+Money+in+usual+times copy

Econ+102+lecture+19%2C+3-22-12+-+Money+in+usual+times copy...

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Lecture 19: Money in the “usual” times: The  Philips Curve Econ 102, Winter 2012 3/22/2012 1 Required reading : Ch 16: pp. 451-462
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Outline 1. Short run U/ π tradeoff: the Philips Curve 2. The Long Run Philips Curve 3. NAIRU, full employment, and monetary neutrality 3/22/2012 2
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Inflation and unemployment I think of chapter 16, as having two sections. 1. “money and inflation in the usual circumstances” 2. “money and inflation in un usual circumstances” – hyperinflation and deflation Today: the “usual” effects of money on unemployment, and its relation to inflation– the Philips curve What’s “usual” here? . Periods of moderate inflation . In US experience post-WWII, roughly 1% - 15% (annual) inflation 3/22/2012 3
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Inflation and unemployment Fast inflation and fast deflation were both typical pre- 1950. Under the Bretton Woods monetary system (and after its collapse) – that is, “modern” central banking – low, stable, positive inflation has been the norm 4
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Inflation and unemployment Our AD-AS model gives us a relationship between unemployment (via production relative to full employment levels) and inflation The Keynesian business cycle model is driven by AD shocks AD-driven recessionary gap: 1. Productive growth falls below potential (resources are utilized below their natural levels) 2. Inflation falls AD-driven inflationary gap: 1. Productive growth rises above potential (resources 3/22/2012 5
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Inflation and unemployment g Inflationary gap Recessionary gap inflation (π) π U U rGDP growth (g) 6
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Inflation and unemployment Said differently: expansionary policies tend to cause inflation, contractionary policies tend to reduce inflation There is always political pressure to “create jobs”, which tends to increase inflation In high-inflation times, the only way to fight inflation is to “create” a recession, which is clearly not a popular choice The “Volker recession” of 1982-83 generated costs – foregone output - equivalent to 18% of one year’s GDP When reports say “we’re in the worst recession in 30 years”, this is the recession they’re talking 3/22/2012 7
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Inflation and unemployment Cyclic al = (actual GDP – potential) x100 potential = actual – natural unemp 8
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