Slides T Economia dei Mercati Monetari e Finanziariopic 7 Lec

7/24/2019 Slides T Economia dei Mercati Monetari e Finanziariopic 7 Lec

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macroeconomicsfifth edition

N. Gregory Mankiw

PowerPointSlides

by Ron Cronovich

macro

2002 Worth Publishers, all rights reserved

Topic 7:

Money and Inflation(chapter 4)


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m

C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide 2

In thi% chapter yo& will learnIn thi% chapter yo& will learn

The classical theory of ination causes

eects

social costs

Classical -- assumes prices are

exible & markets clear.

Applies to the lon run.


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'.. inflation it% trend*'.. inflation it% trend* +,-/0++,-/0+

0

2

4

6

!0

!2

!4

!6

!"60 !"6# !"$0 !"$# !"0 !"# !""0 !""# 2000

1

pery

ear

inflation rate


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'.. inflation it% trend*'.. inflation it% trend* +,-/0++,-/0+

0

2

4

6

!0

!2

!4

!6

!"60 !"6# !"$0 !"$# !"0 !"# !""0 !""# 2000

1peryear

inflation rate inflation rate trend


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide #

The connection 2etweenThe connection 2etween

money and price%money and price%

!nation rate " the percentae increasein the a#erae le#el of prices.

price " amount of money re$uire% tobuy a oo%.

ecause prices are %e'ne% in terms ofmoney( )e nee% to consi%er the natureof money(

the supply of money( an% ho) it iscontrolle%.


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Money: definitionMoney: definition

MoneyMoneyis the stockis the stock

of assets that canof assets that can

be rea%ily use% tobe rea%ily use% tomake transactions.make transactions.


7/68C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide $

Money: f&nction%Money: f&nction%

1. medium of exchangewe use it to buy stuf

2. store of value

transers purchasing power romthe present to the uture

3. unit of accountthe common unit by whicheveryone measures prices andvalues


8/68C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide

Money: type%Money: type%

1. at money* has no intrinsic value

* example: the paper currency we

use

2. commodity money* has intrinsic value

* examples: gold coins,

cigarettes in P.O.W. camps


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide "

Discussion QuestionDiscussion Question

+hich of these are money,a. Currency

b. Checks

c. eposits in checkin accountscalle% %eman% %eposits/

d. Cre%it car%s

e. Certi'cates of %epositcalle% time %eposits/


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide !0

The money %&pply monetary policyThe money %&pply monetary policy

The money supplyis the $uantityof money a#ailable in the economy.

Monetary policyis the control

o#er the money supply.


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide !!

The central 2ankThe central 2ank

0onetary policy is con%ucte% by acountry1s central bank.

!n the 2.3.(

the centralbank is

calle% the

Federal

Reservethe

Fed/. The Federal Reserve BuildingWashington, DC


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Money %&pply mea%&re%*Money %&pply mea%&re%* !pril 00!pril 00

43ymbol Assets inclu%e% Amount billions/4

C Currency 5678.9

0: C ; %eman% %eposits( ::9 0: ; small time %eposits( 6 ; lare time %eposits( 8=6


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The 3&antity Theory of MoneyThe 3&antity Theory of Money

A simple theory linkin theination rate to the ro)thrate of the money supply.

eins )ith a concept calle%velocity@


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elocityelocity

basic concept: the rate at )hich moneycirculates

denition: the number of times thea#erae %ollar bill chanes han%s in a

i#en time perio% example !n >==:(

* 56== billion in transactions*

money supply " 5:== billion*The a#erae %ollar is use% in '#etransactions in >==:

* 3o( #elocity " 6


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide !#

elocity*elocity* cont.cont.

This suests the follo)in %e'nition

=T

VM

)hereV" #elocity

T" #alue of all transactions

M" money supply


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elocity*elocity* cont.cont.

2se nominal B as a proxy for totaltransactions.

Then( P YV

M

=

)here

P " price of output B

%eator/

Y " $uantity of output real B/

P Y " #alue of output nominal

B/


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide !$

The 5&antity e5&ationThe 5&antity e5&ation

The uantity euationM V" P Y

follo)s from the prece%in %e'nition

of #elocity.

!t is an identity:

it hol%s by %e'nition of the #ariables.


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide !

Money demand and the 5&antity e5&ationMoney demand and the 5&antity e5&ation

MP" real money balances( thepurchasin po)er of the money supply.

A simple money %eman% function

MP/%" kY)here

k" ho) much money people )ish to

hol% for each %ollar of income.kis exoenous/


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide !"

Money demand and the 5&antity e5&ationMoney demand and the 5&antity e5&ation

money %eman% MP/%" kY

$uantity e$uation M V" P Y

The connection bet)een them k"

:DV

+hen people hol% lots of money

relati#e to their incomes kis hih/(

money chanes han%s infre$uently V

is lo)/.


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back to the Quantity Theory of Moneyback to the Quantity Theory of Money

starts )ith $uantity e$uation

assumes V is constant & exoenous

=V V

+ith this assumption( the $uantitye$uation can be )ritten as

= M V P Y


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide 2!

The 3&antity Theory of MoneyThe 3&antity Theory of Money, cont., cont.

Eo) the price le#el is %etermine%

+ith V constant( the money supply

%etermines nominal B P Y / Feal B is %etermine% by the

economy1s supplies of K an% L an% the

pro%uction function chap ?/

The price le#el is

P" nominal B/Dreal B/

= M V P Y


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The $uantity e$uation in ro)th

rates

M V P Y

M V P Y + = +

The $uantity theory of money assumes

is constant( so " =.V

VV


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Get Breek letter pi/%enote the ination rate

M P Y

M P Y

= +

PP

=

The result from the

prece%in sli%e

)as3ol#e this

resultfor to et


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Hormal economic ro)th re$uires a

certain amount of money supply ro)th

to facilitate the ro)th in transactions.

0oney ro)th in excess of this amount

lea%s to ination.


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide 2#


YY %epen%s on ro)th in the factors of

pro%uction an% on technoloical proressall of )hich )e take as i#en( for no)/.

!ence, the "uantity #heory o $oney predicts

a one%or%one relationbetween changes in the

money growth rate and changes in the

in&ation rate.


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International data onInternational data on

inflation and money growthinflation and money growth

!nfation ratepercent(loarithmicscale/

:(===

:=(===

:==

:=

:

=.:

0oney supply ro)th percent( loarith

=.: : := :== :(=== :=(===

'icaragua

(ngola

)ra*il

)ulgaria

+eorgia

,uwait

-.(

/apan0anada

+ermany

Oman

1emocratic 2eof 0ongo


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide 2$

'.. data on'.. data on

inflation and money growthinflation and money growth

= > < I

Bro)th in money supply p

8 := :

8

I

=

- >

- >'%your%ige?

The in!ation tax

rintin money to raise re#enue causesination. !nation is like a tax on people

)ho hol% money.


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide 2"

Inflation and intere%t rate%Inflation and intere%t rate%

Hominal interest rate( inot a%Juste% for ination

Feal interest rate( r

a%Juste% for inationr " i


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The 6i%her #ffectThe 6i%her #ffect

The Kisher e$uation i " r ; Chap ? S " I %etermines r.

Eence( an increase in

causes an e$ual increase in i.

This one-for-one relationship

is calle% the Fisher e"ect.


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'.. inflation and nominal intere%t rate%*'.. inflation and nominal intere%t rate%*+,0/+,,8+,0/+,,8

ercent

:I

:

:=

8

I

=

->

'ominalinterest rate

@n&ation

rate

:76= :766 :7I= :7I6 :79=

Lear

:796 :78= :786 :77= >===:776


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Inflation and nominal intere%t rate%Inflation and nominal intere%t rate%acro%% co&ntrie%acro%% co&ntrie%

!nfation rate .percent( loarith

Hominalinterest rate.percent(loarithmicscale/

:==

:=

:: := :== :==

,enya

,a*aAhsta

(rme

'igeria

-ruguay

-nited ,ingdom

-nited .tates

.ingapore

+ermany/apan

Brance

@taly


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Exercise:Exercise:

3uppose V is constant( M is ro)in 6M per

year( Y is ro)in >M per year( an% r " percentae points per year( 'n% i.

c. 3uppose the ro)th rate of Y falls to :M per

year. +hat )ill happen to , +hat must the Ke% %o if it )ishes to

keep constant,


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Answers:Answers:

a. Kirst( 'n% " 6 > " ?.

Then( 'n% i " r; " < ; ? " 9.

b. i " >( same as the increase in themoney ro)th rate.

c. !f the Ke% %oes nothin( " :.

To pre#ent ination from risin( Ke% mustre%uce the money ro)th rate by :

percentae point per year.

3upposeV

is constant(M

is ro)in 6M peryear( Y is ro)in >M per year( an% r "


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Two real intere%t rate%Two real intere%t rate%

" actual ination ratenot kno)n until after it has occurre%/

e" expecte% ination rate

i e " ex antereal interest rate

)hat people expect at the time they buya bon% or take out a loan

i " ex post real interest rate)hat people actually en% up earnin ontheir bon% or payin on their loan

M d d d


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Money demand andMoney demand andthe nominal intere%t ratethe nominal intere%t rate

The Nuantity Theory of 0oney assumesthat the %eman% for real money balances%epen%s only on real income Y.

+e no) consi%er another %eterminant of

money %eman% the nominal interest rate.The nominal interest rate i is the

opportunity cost of hol%in money instea%of bon%s or other interest-earnin assets/.

Eence( i in money %eman%.


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The money demand f&nctionThe money demand f&nction

MP /%" real money %eman%( %epen%s

neati#ely on i

i is the opp. cost of hol%in money positi#ely on Y

hiher Y

more spen%in

so( nee% more money

L is use% for the money %eman% functionbecause money is the most li$ui% asset./

( ) ( , )%

M P L i Y =


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The money demand f&nctionThe money demand f&nction

+hen people are %eci%in )hether tohol% money or bon%s( they %on1t kno)

)hat ination )ill turn out to be.

Eence( the nominal interest rate

rele#ant for money %eman% is r ; e.

( ) ( , )%

M P L i Y =( , )eL r Y+=


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#5&ili2ri&m#5&ili2ri&m

( , )eM

L r YP

= +

The supply of

real moneybalances

Feal money%eman%


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What determines whatWhat determines what

#ariable ho) %etermine% =in the long run?

M exoenous the Ke%/

r a%Justs to make S" I

Y

( , )eM

L r YP

= +

. ( /Y F K L=

P a%Justs to

make ( /

ML i Y

P=


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owow PP re%pond% tore%pond% to MM

Kor i#en #alues of r( Y( an% e(

a chane in M causes P to chane

by the same percentae --- Just like

in the Nuantity Theory of 0oney.

( , )eM

L r YP

= +


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What about expected infation!What about expected infation!

O#er the lon run( people %on1t consistently

o#er- or un%er-forecast ination(

so e"on a#erae.

!n the short run( emay chane )hen people

et ne) information. PQ 3uppose Ke% announces it )ill increase

M next year. eople )ill expect next year1s

P to be hiher( so erises.

This )ill aect P no)( e#en thouh M hasn1t

chane% yet.=continuedC?


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owow PP re%pond% tore%pond% to ee

( , )eM

L r YP

= +

the Kisher eect/e

i

( )%

M P

( ) to make fall

to re-establish e$Rm

P M P

Kor i#en #alues of r( Y( an% M(


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Discussion QuestionDiscussion Question

Why is infation bad? +hat costs %oes ination impose on

society, Gist all the ones you can think

of. Kocus on the lon run.

Think like an economist.


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! common mi%perception! common mi%perception

Common misperceptionin&ation reduces real wages

This is true only in the short run( )hennominal )aes are 'xe% by contracts.

Chap ?/ !n the lon run(the real )ae is %etermine% by laborsupply an% the marinal pro%uct of labor(not the price level or in&ation rate

. Consi%er the %ata@


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!9erage ho&rly earning% the C"I!9erage ho&rly earning% the C"I

0

2

4

6

!0

!2

!4

!6

!

!"64 !"6 !"$2 !"$6 !"0 !"4 !" !""2 !""6 2000

:perho&r

0

2#

#0

$#

!00

!2#

!#0

!$#

200

22#

2#0

C"I%!"

3&!00'

Average

hourly

earnin s

Hourly earnings

in 2001 dollars

Consumer

Price Index

0

2

4

6

!0

!2

!4

!6

!

!"64 !"6 !"$2 !"$6 !"0 !"4 !" !""2 !""6 2000

:perh

o&r

0

2#

#0

$#

!00

!2#

!#0

!$#

200

22#

2#0

C"I%!"3&!00'

Average

hourly

earnin s

Hourly earnings

in 2001 dollars

Consumer

Price Index


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The cla%%ical 9iew of inflationThe cla%%ical 9iew of inflation

#he classical view:A chane in the price le#el is merely achane in the units of measurement.

o why, then, iso why, then, is

in&ation a socialin&ation a social

problemDproblemD


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The %ocial co%t% of inflationThe %ocial co%t% of inflation

@fall into t)o cateories:.costs )hen ination is expecte%

>. a%%itional costs )hen ination is

%ierent than people ha%expecte%.

The co%t% of e;pected inflation:The co%t% of e;pected inflation:


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The co%t% of e;pected inflation:The co%t% of e;pected inflation:11..shoeleather costshoeleather cost

%ef the costs an% incon#eniences of re%ucinmoney balances to a#oi% the ination tax.

i

real money balances

Femember !n lon run( ination %oesn1taect real income or real spen%in.

3o( same monthly spen%in but lo)er

a#erae money hol%ins means morefre$uent trips to the bank to )ith%ra) smalleramounts of cash.



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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide #0

The co%t% of e;pected inflation:The co%t% of e;pected inflation:22..menu costsmenu costs

%ef The costs of chanin prices. Pxamples

print ne) menus

print & mail ne) catalosThe hiher is ination( the more

fre$uently 'rms must chane their

prices an% incur these costs.



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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide #!

The co%t% of e;pected inflation:The co%t% of e;pected inflation:33..relative price distortionsrelative price distortions

Kirms facin menu costs chane pricesinfre$uently.

Pxample3uppose a 'rm issues ne) catalo each

Sanuary. As the eneral price le#el risesthrouhout the year( the 'rm1s relati#e price)ill fall.

ierent 'rms chane their prices at %ierent

times( lea%in to relati#e price %istortions@

@)hich cause microeconomic inecienciesin the allocation of resources.


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The co%t% of e;pected inflation:The co%t% of e;pected inflation:$$..%eneral inconvenience%eneral inconvenience

!nation makes it har%er to comparenominal #alues from %ierent timeperio%s.

This complicates lon-rane 'nancialplannin.

!dditional co%t oft ona co%t o unexpectedunexpecte inflation:n at on:


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ppar2itrary redi%tri2&tion% of p&rcha%ingar2itrary redi%tri2&tion% of p&rcha%ing

powerpower 0any lon-term contracts not in%exe%(

but base% on e.

!f turns out %ierent from e(then some ain at others1 expense.

Pxample borro)ers & len%ers

* !f V e( then i / W i e/an% purchasin po)er is transferre%

from len%ers to borro)ers.* !f W e( then purchasin po)er is

transferre% from borro)ers to len%ers.

!dditional co%t of high inflation:!dditional co%t of high inflation:


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide ##

!dditional co%t of high inflation:!dditional co%t of high inflation:increa%ed &ncertaintyincrea%ed &ncertainty

+hen ination is hih( it1s more#ariable an% unpre%ictable

turns out %ierent from e moreoften( an% the %ierences ten% to be

larer =though not systematicallypositive or negative?

Arbitrary re%istributions of )ealthbecome more likely.

This creates hiher uncertainty( )hichmakes risk a#erse people )orse o.


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide #$

yperinflationyperinflation

%ef

6=M per month

All the costs of mo%erate ination %escribe%

abo#e become HUGEun%er hyperination.

0oney ceases to function as a store of #alue(an% may not ser#e its other functions unit ofaccount( me%ium of exchane/.

eople may con%uct transactions )ith barter or

a stable forein currency.


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C!"T#$ 4C!"T#$ 4 Money and Inflation Money and Inflation slide #

=hat ca&%e% hyperinflation>=hat ca&%e% hyperinflation>

Eyperination is cause% by excessi#emoney supply ro)th

+hen the central bank prints money(the price le#el rises.

!f it prints money rapi%ly enouh( theresult is hyperination.

$ecent epi%ode% of hyperinflation$ecent epi%ode% of hyperinflation


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$ecent epi%ode% of hyperinflation$ecent epi%ode% of hyperinflation

slide #"


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=hy go9ernment% create hyperinflation=hy go9ernment% create hyperinflation

+hen a o#ernment cannot raisetaxes or sell bon%s(

it must 'nance spen%in increases byprintin money.

!n theory( the solution tohyperination is simple stop printinmoney.

!n the real )orl%( this re$uires %rastican% painful 'scal restraint.

Th Cl i l ?i h tTh Cl i l ?i h t


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The Cla%%ical ?ichotomyThe Cla%%ical ?ichotomy

Real ariablesare measure% in physical units

$uantities an% relati#e prices( e.. $uantity of output pro%uce%

real )ae output earne% per hour of )ork

real interest rate output earne% in the future

by len%in one unit of output to%ay!o"inal ariables: measure% in money units(e..

nominal )ae %ollars per hour of )ork

nominal interest rate %ollars earne% in futureby len%in one %ollar to%ay

the price le#el the amount of %ollars nee%e%to buy a representati#e basket of oo%s

slide 6!

Th Cl i l ?i h tTh Cl i l ?i h t


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The Cla%%ical ?ichotomyThe Cla%%ical ?ichotomy

Hote Feal #ariables )ere explaine% in Chap?(nominal ones in Chap


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6riendly 5&i@ AB6riendly 5&i@ AB(rite answers to the followin) 44*+estions on a*+estions on a

sheet of ,a,er to hand in %each worth ! ,oint'-sheet of ,a,er to hand in %each worth ! ,oint'-:/Lour name an% section %ayDtime

3uppose V is constant( M is ro)in M per year( an% r "?.

>/ 3ol#e for the ination rate.

?/ 3ol#e for i the nominal interest rate/.


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Answers:Answers:

>/ " M " >M.

?/ i " r; " ?M ; >M " 6M =.=6/.


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Chapter %&mmaryChapter %&mmary

:. Nuantity theory of money assumption #elocity is stable conclusion the money ro)th

rate %etermines the ination

rate.

>. 0oney %eman% %epen%s on income in the

Nuantity Theory more enerally( it also %epen%s

on the nominal interest rateX

Ch tCh t


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?. Hominal interest rate e$uals real interest rate ; ination. Kisher eect it mo#es one-for-one

)ith expecte% ination.


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9. Classical %ichotomy

!n classical theory( money is neutral--

%oes not aect real #ariables.

3o( )e can stu%y ho) real #ariables are

%etermine% )Do reference to nominalones.

Then( e$1m in money market %etermines

price le#el an% all nominal #ariables.

0ost economists belie#e the economy)orks this )ay in the lon run.

$egrade policy$e

grade policy: If yo& wo&ld like yo&r te%t regraded*: If yo& wo&ld like yo&r te%t regraded*%&2mit a written %tatement e;plaining why o&r entire%&2mit a written %tatement e;plaining why o&r entire


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%&2mit a written %tatement e;plaining why. o&r entire%&2mit a written %tatement e;plaining why. o&r entire

te%t will 2e regraded* %o point% might 2e lo%t on net.te%t will 2e regraded* %o point% might 2e lo%t on net.

0e%ian M/

0ean ?7.< 9=M/

Eih 6I

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