Lecture 11_EC3332[1] - 1 Lecture 11 Monetary Policy and...

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Unformatted text preview: 10/15/2010 1 Lecture 11 Monetary Policy and Inflation Money and Inflation: The Evidence “Inflation is Always and Everywhere a Monetary Phenomenon” (M. Friedman) Evidence In every case when π high for sustained period , M growth is high Examples: 1. Latin American inflations 2. German Hyperinflation, 1921–23 Controlled experiment, particularly after 1923 invasion of Ruhr— govt prints money to pay strikers, π > 1 million % Meaning of “inflation” Friedman’s statement uses definition of π as continuing, rapidly rising price level: Only then does evidence support it 10/15/2010 2 π and Money Growth in Latin America German Hyperinflation: 1921–23 10/15/2010 3 Response to Continually Rising M s Monetarist and Keynesian View 1. M ↑ continually, shifts AD to right from AD 1 to AD 2 to AD 3 , etc. 2. Y > Y n , wages ↑ , AS shifts from AS 1 to AS 2 to AS 3 , etc. 3. P continually rises from P 1 to P 2 to P 3 , etc.: i.e., have inflation Monetarist and Keynesian Views of π Monetarist View Only source of AD shifts and π in Figure 2 can be M s growth growth Keynesian View Allows for other sources of AD shifts, but same conclusion that only source of sustained high π is M s growth 1. Figure 3 shows that fiscal policy without M s growth only causes P ↑ , but not sustained π 2. Figure 4 shows that supply shock does not lead to sustained π 10/15/2010 4 Response to One-Shot Increase in...
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Lecture 11_EC3332[1] - 1 Lecture 11 Monetary Policy and...

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