Chapter 12 Goals of Chapter 12 A. Why study unemployment and - - PowerPoint PPT Presentation

マクロ経済学中級

Chapter 12

Goals of Chapter 12

• A. Why study unemployment and inflation together?
• 1.

The most important macroeconomic problems

• 2.

Phillips curve relationship

• B. Study relationship between inflation and unemployment
• 1.

Has it changed over time?

• 2.

Is there a trade-off between inflation and unemployment? C.Study the costs of inflation and unemployment; consider the implications for macroeconomic policy making

12.1 Unemployment and Inflation: Is There a Trade-off?

Many people think there is a trade-off between inflation and unemployment

1.The idea originated in 1958 when A.W. Phillips showed a negative relationship between unemployment and nominal wage growth in Britain 2.Since then economists have looked at the relationship between unemployment and inflation 3.In the 1950s and 1960s many nations seemed to have a negative relationship between the two variables 4.The United States appears to be on one Phillips curve in the 1960s (text Fig. 12.1)

Figure 12.01 The Phillips curve and the U.S. economy during the 1960s

5.This suggested that policymakers could choose the combination of unemployment and inflation they most desired 6.But the relationship fell apart in the following three decades (text Fig. 12.2) 7.The 1970s were a particularly bad period, with both high inflation and high unemployment, inconsistent with the Phillips curve

Figure 12.02 Inflation and unemployment in the United States, 1970-1998

The expectations-augmented Phillips curve

1.Friedman and Phelps: The cyclical unemployment rate (the difference between actual and natural unemployment rates) depends only on unanticipated inflation (the difference between actual and expected inflation)

a.This theory was made before the Phillips curve began breaking down in the 1970s b.It suggests that the relationship between inflation and the unemployment rate isn't stable

How does this work in the extended classical model?

• a. First case: anticipated increase in

money supply (Fig. 12.1; like text Fig. 12.3)

• (1) AD shifts up and SRAS shifts up, with

no misperceptions

• (2) Result: P rises, Y unchanged
• (3) Inflation rises with no change in

unemployment

Figure 12.03 Ongoing inflation in the extended classical model

b.Second case: unanticipated increase in money supply (Fig. 12.2; like text Fig. 12.4)

(1)AD expected to shift up to AD2, old (money supply expected to rise 10%), but unexpectedly money supply rises 15%, so AD shifts further up to AD2, new (2)SRAS shifts up based on expected 10% rise in money supply (3)Result: P rises and Y rises as misperceptions

• ccur

(4)So higher inflation occurs with lower unemployment (5)Long run: P rises further, Y declines to full- employment level

Figure 12.04 Unanticipated inflation in the extended classical model

• c. Expectations-augmented Phillips curve:

π = πe - h(u - ) (12.1) (1) When π = πe, u = (2) When π < πe, u > (3) When π < πe, u <

u u

u u

• C. The shifting Phillips curve

1.The Phillips curve shows the relationship between unemployment and inflation for a given expected rate of inflation and natural rate of unemployment

• 2. Changes in the expected rate of inflation

(Fig. 12.5)

• a. For a given expected rate of inflation, the

Phillips curve shows the trade-off between cyclical unemployment and actual inflation

• b. The Phillips curve is drawn such that

π = πe when u =

• c. Higher expected inflation implies a higher

Phillips curve

u

Figure 12.05 The shifting Phillips curve: an increase in expected inflation

• 3. Changes in the natural rate of

unemployment (Fig. 12.6)

• a. For a given natural rate of unemployment,

the Phillips curve shows the trade-off between unemployment and unanticipated inflation

• b. A higher natural rate of unemployment shifts

the Phillips curve to the right

Figure 12.06 The shifting Phillips curve: an increase in the natural unemployment rate

4. Supply shocks and the Phillips curve

• a. A supply shock increases both expected

inflation and the natural rate of unemployment

(1) A supply shock in the classical model increases the natural rate of unemployment, because it increases the mismatch between firms and workers (2) A supply shock in the Keynesian model reduces the marginal product of labor and thus reduces labor demand at the fixed real wage, so the natural unemployment rate rises

• b. So an adverse supply shock shifts the Phillips

curve up and to the right

• c. The Phillips curve will be unstable in periods

with many supply shocks

The shifting Phillips curve in practice

a.Why did the original Phillips curve relationship apply to many historical cases?

(1)The original relationship between inflation and unemployment holds up as long as expected inflation and the natural rate of unemployment are approximately constant (2)This was true in the United States in the 1960s, so the Phillips curve appeared to be stable

b Why did the U.S. Phillips curve disappear after 1970?

(1) Both the expected inflation rate and the natural rate of unemployment varied considerably more in the 1970s than they did in the 1960s (2) Especially important were the oil price shocks of 1973– 1974 and 1979–1980 (3) Also, the composition of the labor force changed in the 1970s and there were other structural changes in the economy as well, raising the natural rate of unemployment (4) Monetary policy was expansionary in the 1970s, leading to high and volatile inflation (5) Plotting unanticipated inflation against cyclical unemployment shows a fairly stable relationship since 1970 (text Fig. 12.7

Figure 12.07 The expectations-augmented Phillips curve in the United States, 1970-1998

Macroeconomic policy and the Phillips curve

• Can the Phillips curve be exploited by

policymakers?

• Can they choose the optimal

combination of unemployment and inflation?

a.Classical model: NO (1) The unemployment rate returns to its natural level quickly, as people's expectations adjust (2) So unemployment can change from its natural level only for a very brief time (3) Also, people catch on to policy games; they have rational expectations and try to anticipate policy changes, so there is no way to fool people systematically

• b. Keynesian model: YES, temporarily

(1) The expected rate of inflation in the Phillips curve is the forecast of inflation at the time the oldest sticky prices were set (2) It takes time for prices and expected prices to adjust, so unemployment may differ from the natural rate for some time

Box 12.1: The Lucas critique

a.When the rules of the game change, behavior changes b.For example, if batters in baseball were called out after two strikes instead of three, they'd swing more

• ften when they have one strike than they do now
• c. Lucas applied this idea to macroeconomics, arguing

that historical relationships between variables won't hold up if there's been a major policy change d.The Phillips curve is a good example—it fell apart as soon as policymakers tried to exploit it e.Evaluating policy requires an understanding of how behavior will change under the new policy, so both economic theory and empirical analysis are necessary

The long-run Phillips curve

• 1. Long run: u = for both Keynesians and

classicals

• 2. The long-run Phillips curve is vertical, since

when π = πe, u = (Fig. 12.8) u

Figure 12.08 The long-run Phillips curve

The long-run Phillips curve (continued)

3. Changes in the level of money supply have no long-run real effects; changes in the growth rate of money supply have no long-run real effects, either 4. Even though expansionary policy may reduce unemployment only temporarily, policymakers may want to do so if, for example, timing economic booms right before elections helps them (or their political allies) get reelected

12.2 The Problem of Unemployment

The costs of unemployment

1 Loss in output from idle resources

• a. Workers lose income
• b. Society pays for unemployment benefits and

makes up lost tax revenue c.Using Okun's Law (each percentage point of cyclical unemployment is associated with a loss equal to 2.5% of full-employment output), if full-employment output is $7.5 trillion, each percentage point of unemployment sustained for one year costs $187.5 billion

2 Personal or psychological cost to workers and their families

• a. Especially important for those with long

spells of unemployment

3 There are some offsetting factors

• a. Unemployment leads to increased job search

and acquiring new skills, which may lead to increased future output

• b. Unemployed workers have increased leisure

time, though most wouldn't feel that the increased leisure compensated them for being unemployed

The long-term behavior of the unemployment rate

1. The changing natural rate

a.How do we calculate the natural rate of unemployment? b.CBO's estimates: 5% to 5½% today, similar to 1950s and 1960s; over 6% in 1970s and 1980s

• c. Why did the natural rate rise from the 1950s to the late

1970s?

(1) Partly demographics; more teenagers, blacks, and women

(a) Their unemployment rates are higher because of discrimination, language problems, lower educational attainment, interruptions of careers to have children (b) Their proportion of the labor force increased from WWII to about 1980

Figure 12.09 Actual and natural unemployment rates in the United States

• d. Since 1980, demographic forces have reduced

the natural rate of unemployment

(1)The proportion of the labor force aged 16-24 years fell from 25% in 1980 to 16% in 1998 (2)Research by Shimer showed this is the main reason for the fall in the natural rate of unemployment

• e. Some economists think the natural rate of

unemployment is 4.5% or even lower

(1) The labor market has become more efficient at matching workers and jobs, reducing frictional and structural unemployment (2) Temporary help agencies have become prominent, helping the matching process and reducing the natural rate of unemployment (3) Increased productivity of workers can be a cause; if productivity growth of workers is faster than wage growth, firms will hire more workers and natural rate of unemployment will decline temporarily

Measuring the Natural Rate of Unemployment

• Policymakers need measures of the natural rate

when they formulate economic policy.

• I.e. if policymakers observe that the

unemployment rate is above natural rate then they might consider using expansionary monetary or fiscal policy to bring economy back to its full-employment equilibrium.

• To use the unemployment rate as an indicator

for setting policy, the policymaker needs a good measure of natural rate of unemployment.

• However, economists widely disagree

about how to measure the natural rate.

• According to the paper by Staiger, Stock

and Watson (1997) in Journal of Economic Perspectives, natural rate could not be measured at all precisely. Their best estimate is 5.75% but its 95% confidence interval is between 4.8% and 6.6%.

• This is too large to be of any use to

policymakers

• Given uncertainty about natural rate of

unemployment, policymakers want to be less aggressive with policy changes than they would be if they knew the value of natural rate more precisely.

12.3 The Problem of Inflation

The costs of inflation

1. Perfectly Anticipated Inflation a. No effects if all prices and wages keep up with inflation b. Even returns on assets may rise exactly with inflation c. Shoe-leather costs: People spend resources to economize on currency holdings; the estimated cost of 10% inflation is 0.3% of GNP d. Menu costs: the costs of changing prices (but technology may mitigate this somewhat)

• 2. Unanticipated Inflation
• a. Realized real returns differ from expected

real returns

(1) Expected r = i - πe (2) Actual r = i - π (3) Actual r differs from expected r by πe - π (4) Numerical example: i = 6%, πe = 4%, so expected r = 2%; if π = 6%, actual r = 0%; if π = 2%, actual r = 4%

• b. Similar effect on wages and salaries

• c. Result: transfer of wealth

(1) From lenders to borrowers when π > πe (2) From borrowers to lenders when π < πe

• d. So people want to avoid risk of unanticipated

inflation

(1) They spend resources to forecast inflation (2) Some of these costs can be eliminated by contracts that are indexed to the price level

• e. Loss of valuable signals provided by prices

(1) Confusion over changes in aggregate prices vs. changes in relative prices (2) People expend resources to extract correct signals from prices

Box 12.2: Indexed contracts

(a) People could use indexed contracts to avoid the risk of transferring wealth because of unanticipated inflation (b) Most U.S. financial contracts are not indexed, with the exception of some long-term contracts like adjustable-rate mortgages and inflation- indexed bonds issued by the U.S. Treasury beginning in 1997 (c) Many U.S. labor contracts are indexed by COLAs (cost-of-living adjustments) (d) Indexed contracts are more prevalent in countries with high inflation

The costs of Hyperinflation

• a. Hyperinflation is a very high, sustained inflation

(for example, 50% or more per month)

(1) Hungary in August 1945 had inflation of 19,800% per month (2) Bolivia had annual rates of inflation of 1281% in 1984, 11,750% in 1985, 276% in 1986

• b. There are large shoe-leather costs, as people

minimize cash balances

• c. People spend many resources getting rid of

money as fast as possible

• d. Tax collections fall, as people pay taxes with

money whose value has declined sharply

• e. Prices become worthless as signals, so markets

become inefficient

Fighting Inflation: The Role of Inflationary Expectation

• 1. If rapid money growth causes inflation,

why do central banks allow the money supply to grow rapidly?

• a. Developing or war-torn countries may not be

able to raise taxes or borrow, so they print money to finance spending

• b. Industrialized countries may try to use

expansionary monetary policy to fight recessions, then not tighten monetary policy enough later

• 2. Disinflation is a reduction in the rate of

inflation

• a. But disinflations may lead to recessions
• b. An unexpected reduction in inflation leads to

a rise in unemployment along the Phillips curve.

• c. The costs of disinflation could be reduced if

expected inflation fell at the same time actual inflation fell

• 3. The costs of disinflation could be reduced

if expected inflation fell at the same time actual inflation fell

Rapid versus gradual disinflation

The classical prescription for disinflation is cold turkey —a rapid and decisive reduction in money growth

(1) Proponents argue that the economy will adjust fairly quickly, with low costs of adjustment, if the policy is announced well in advance (2) Keynesians disagree

(a) Price stickiness due to menu costs and wage stickiness due to labor contracts make adjustment slow (b) Cold turkey disinflation would cause a major recession (c) The strategy might fail to alter inflation expectations, because if the costs of the policy are high (because the economy goes into recession), the government will reverse the policy

Keynesian prescription for disinflation is gradualism

(1)A gradual approach gives prices and wages time to adjust to the disinflation (2)Such a strategy will be politically sustainable because the costs are low

Wage and price controls

• a. Pro: Controls would hold down inflation,

thus lowering expected inflation and reducing the costs of disinflation

• b. Con: Controls lead to shortages and

inefficiency; once controls are lifted, prices will rise again

• The Nixon wage-price controls
• (1) Price controls from August 1971 to

April 1974

• (2) Shortages developed in many products
• (3) The controls reduced inflation when

they were in effect, but prices returned to where they would have been soon after the controls were lifted

• (4) Macro policies remained expansionary,

so inflation didn't decline

• c. The outcome of wage and price controls

(whether they affect inflation expectation

• r not) may depend on what happens with

fiscal and monetary policy

(1)If policies remain expansionary, people will expect renewed inflation when the controls are lifted (2)If tight policies are pursued, expected inflation may decline

Credibility and Reputation

a.Key determinant of the costs of disinflation: how quickly expected inflation adjusts b.This depends on credibility of disinflation policy; if people believe the government and if the government carries through with its policy, expected inflation should drop rapidly

• c. Credibility can be enhanced if the government

gets a reputation for carrying out its promises d.Also, having a strong and independent central bank that is committed to low inflation provides credibility

The U.S. Disinflation of the 1980s and 1990s

• Inflation rate in 70s was high
• From 1979 on the Fed sought to eliminate

inflation

• At the beginning disinflation process was a bit

unstable due to the lack of credibility.

• Fed’s credibility can be seen in expected

inflation rate.

• By 1990 the Fed’s credibility was gained as can

be seen in steady drop of expected inflation rate.

• (Inflation rate in 2004 to 06 was low considering

the large increase in oil price)