A rst simple view in macroeconomics is to consider

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A °rst simple view in macroeconomics is to consider in±ation as the relevant summary for monetary condition and hence to observe the relationship between in±ation and real economic activity. This is the Phillips curve economics. Class 5 Monetary Policy
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The Phillips Curve Following, Keynes (1936) stimulus. First link between macroeconomic policy (in±ation) and unemployment. Phillips (1958) proves the existence on a simple statistical relationship between wage in±ation and unemployment Δ w = a ± bu This relationship was extended toward variation in the price level (in±ation) and unemployment π = a ± bu Class 5 Monetary Policy
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Class 5 Monetary Policy
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How is this relationship possible in the long-run ? An explanation: Workers do not anticipate correctly the actual in±ation rate, and their bargaining power depends on unemployment. The wage at period t is thus W t = P a , t ± 1 t ( 1 ± α u t ) (1) Assume to simplify that prices are a constant mark-up over unit labor cost. P t = ( 1 + μ ) W t (2) Class 5 Monetary Policy
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How is this relationship possible in the long-run ? An explanation: Workers do not anticipate correctly the actual in±ation rate, and their bargaining power depends on unemployment. The wage at period t is thus W t = P a , t ± 1 t ( 1 ± α u t ) (1) Assume to simplify that prices are a constant mark-up over unit labor cost. P t = ( 1 + μ ) W t (2) It yields P t = P a , t ± 1 t ( 1 + μ ) ( 1 ± α u t + z ) Class 5 Monetary Policy
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How is this relationship possible in the long-run ? An explanation: Workers do not anticipate correctly the actual in±ation rate, and their bargaining power depends on unemployment. The wage at period t is thus W t = P a , t ± 1 t ( 1 ± α u t ) (1) Assume to simplify that prices are a constant mark-up over unit labor cost. P t = ( 1 + μ ) W t (2) It yields P t = P a , t ± 1 t ( 1 + μ ) ( 1 ± α u t + z ) First order, 1 + π t = P t / P t ± 1 and π a t = P a , t ± 1 t ± P t ± 1 P t ± 1 π t = π a t + ( μ + z ) ± α u t Class 5 Monetary Policy
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Union density and collective bargaining coverage Class 5 Monetary Policy
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If unions have myopic expectations P a , t ± 1 t = P t ± 1 , then π a t = 0. π t = μ ± α u t Unions make some mistakes : the real wage W / P t is always lower than the one expected W t / P a , t ± 1 t . In±ation is a tool to decrease the real wage Class 5 Monetary Policy
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The Vanishing Phillips curve Class 5 Monetary Policy
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Augmented Phillips Curve Unions (and households) have learned to better forecast in±ation. π a t = π t ± 1 On °nds π t = π t ± 1 + ( μ + z ) ± α u t In consequence, Δ π t = π t ± π t ± 1 Δ π t = ( μ + z ) ± α u t Class 5 Monetary Policy
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Class 5 Monetary Policy
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Rational Expectations John Muth Robert Lucas. Why should agent be myopic ? They can expect in±ation as well as economists ! Information is public π a t = E t ± 1 ( π t j I t ± 1 ) Class 5 Monetary Policy
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Rational Expectations John Muth Robert Lucas.
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