Ch03Ad hoc Dynamic Macroeconomics The AS-AD Model(高级宏观经济学-柏林洪堡大学,Michael C. Burda)
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IAMA / Lecture #3 4
2
3. Macroeconomics as the study of aggregate dynamics
• Macroeconomics is interested in dynamics – the behavior of variables over time • We need not only a theory of comparative statics but one about how variables change with respect to time • First attempt to „dynamize“ static models were inductive in nature and ad-hoc in their theoretical motivation
Random Shocks (input)
Cycles (output)
IAMA / Lecture #3
18
9
5. The AS-AD Model as a system of difference equations
Aggregate Demand:
Yt = a1Yt-1 + a2(µt - πt) + dt
Aggregate demand and supply under flexible exchange rates
LAS
AS
Money growth line
AD
Monetary authority chooses the rate of growth of money supply (thereby determining long-run inflation). Nominal exchange rate changes so that PPP holds.
Aggregate Supply/Phillips Curve:
πt =πt + b1(Yt -Yt) + st
Core Inflation/Inflationary Expectations:
πt = λ πt + (1-λ) πt-1
IAMA / Lecture #3 19
where: Yt = real GDP (constant prices) in t Yt = potential real GDP in t πt = inflation rate in t πt = core inflation (infl. expectations) in t dt = real demand shock in t st = supply shock in t µt = money supply growth in t
IAMA / Lecture #3 6
3
Phillips Curves
IAMA / Lecture #3
7
Okun’s Law
IAMA / Lecture #3
8
4
Euroland
16 14 12 Inflation (%) 10 8 6 4 2 0 0 2 4 6 8 10 12 14 Unemployme nt (%)
IAMA / Lecture #3 20
10
5. The AS-AD Model as a system of difference equations
The reduced form of the model, is found by writing in matrix form and solving for [Yt,πt]:
10
IAwk.baidu.comA / Lecture #3
5
4. Bridge between classical and Keynesian views?
• Milton Friedman's famous critique of the old Neoclassical Synthesis: monetary neutrality is violated! • Friedman “rehabilitated” the Phillips curve by introducing explicitly inflationary expectations πe • Now more generally called “core inflation” – what is it?
IAMA / Lecture #3 16
8
Excursion: Modern business cycle theory and visions of Slutsky and Wold
IAMA / Lecture #3
17
Vision of Slutsky
Assumed propagation mechanism (input)
IAMA / Lecture #3
9
Augmented Phillips and aggregate supply curves
Inflation
Inflation
B
AS
B
π
A C
U Unemployment (a) Phillips curve
π
A C
Output Y (b) Aggregate supply Figure 12.5
IAMA / Lecture #3
5. The AS-AD Model as a system of difference equations
• Solving the AS-AD model for the currentvalues: Substitution or matrix manipulation • Result: “Reduced form”: A vector-valued linear difference equation, a set of equations relating current values to their past plus exogenous influences • Still not a solution in the strict sense. We seek functions of time only
Inflation
IAMA / Lecture #3
0
Output gap (Y -Y )
15
5. The AS-AD Model as a system of difference equations
• Slutsky´s vision as a starting point • Role of economic theory for constructing the “black box” as well as identifying the shocks • Demonstration: AS-AD model • In case you don’t know about AS-AD…see e.g. Burda/Wyplosz Ch 12, 13 and 14, especially the appendix to Ch 14
Yt
πt
=
a1 a1b1 1 + a2 b1 (1 − λ ) 1− λ 1 1 a2 a2 b1 1− λ 1 b1 1− λ
− a2 1
Yt −1
π t −1
a2 b1 µ t 1 − λ dt − b1 st 1− λ Y t
21
+
1 + a2 b1 (1 − λ )
− a2 1− λ 1 1− λ
IAMA / Lecture #3 11
4. Bridge between classical and Keynesian views?
• In doing so, Friedman reintroduced a form of microeconomic foundations to the analysis of the supply side…. • …as well as Wicksell’s notion of “natural rate of unemployment” and “natural rate of interest” – and the long-run neutrality of money
IAMA / Lecture #3 5
4. Foundations of macro dynamics
• The first attempt was the Phillips Curve • It was mechanical, but correctly saw role of imbalances in labor market as a source of cost pressure which fed into price inflation • The Phillips Curve, combined with Okun's Law, closed the model • For at least two decades this was the way economists thought about inflation
IAMA / Lecture #3
3
2. Extensions of static models not covered in course
• Monetary wealth and the „real side“ (outside money) • Interest rates, wealth and labor supply • Variations of static Keynesian model • Open economy, „balance of payments approach“ (classical) and Mundell-Fleming (Keynesian) approaches
IAMA / Lecture #3 13
The long run
Inflation
Inflation Unemployment U (a) Phillips curve
Y Output (b) Aggregate supply
Figure 12.3
IAMA / Lecture #3
14
7
Fig. 13.10
Introduction to Advanced Macroeconomic Analysis (IAMA)
Lecture # 3 Ad hoc Dynamic Macroeconomics: The AS-AD Model
IAMA / Lecture #3 1
Summary
• Review of last time • Extensions of static models not covered in course • Macroeconomics as the study of aggregate dynamics • The foundations of macro dynamics • The AS-AD Model as a vehicle for learning about dynamics of deterministic and stochastic difference equations
IAMA / Lecture #3 2
1
1. Review of Last Time
• Comparative statics analysis: An important analytical tool • Analysis of the static classical model • Implications of Keynesian challenge • Analysis of the static Keynesian model
IAMA / Lecture #3 12
6
„The natural rate of unemployment...
...is the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demands and supplies, the costs of gathering information about job vacancies and labor availabilities, the costs of mobility, and so on.“ Milton Friedman (1968)
2
3. Macroeconomics as the study of aggregate dynamics
• Macroeconomics is interested in dynamics – the behavior of variables over time • We need not only a theory of comparative statics but one about how variables change with respect to time • First attempt to „dynamize“ static models were inductive in nature and ad-hoc in their theoretical motivation
Random Shocks (input)
Cycles (output)
IAMA / Lecture #3
18
9
5. The AS-AD Model as a system of difference equations
Aggregate Demand:
Yt = a1Yt-1 + a2(µt - πt) + dt
Aggregate demand and supply under flexible exchange rates
LAS
AS
Money growth line
AD
Monetary authority chooses the rate of growth of money supply (thereby determining long-run inflation). Nominal exchange rate changes so that PPP holds.
Aggregate Supply/Phillips Curve:
πt =πt + b1(Yt -Yt) + st
Core Inflation/Inflationary Expectations:
πt = λ πt + (1-λ) πt-1
IAMA / Lecture #3 19
where: Yt = real GDP (constant prices) in t Yt = potential real GDP in t πt = inflation rate in t πt = core inflation (infl. expectations) in t dt = real demand shock in t st = supply shock in t µt = money supply growth in t
IAMA / Lecture #3 6
3
Phillips Curves
IAMA / Lecture #3
7
Okun’s Law
IAMA / Lecture #3
8
4
Euroland
16 14 12 Inflation (%) 10 8 6 4 2 0 0 2 4 6 8 10 12 14 Unemployme nt (%)
IAMA / Lecture #3 20
10
5. The AS-AD Model as a system of difference equations
The reduced form of the model, is found by writing in matrix form and solving for [Yt,πt]:
10
IAwk.baidu.comA / Lecture #3
5
4. Bridge between classical and Keynesian views?
• Milton Friedman's famous critique of the old Neoclassical Synthesis: monetary neutrality is violated! • Friedman “rehabilitated” the Phillips curve by introducing explicitly inflationary expectations πe • Now more generally called “core inflation” – what is it?
IAMA / Lecture #3 16
8
Excursion: Modern business cycle theory and visions of Slutsky and Wold
IAMA / Lecture #3
17
Vision of Slutsky
Assumed propagation mechanism (input)
IAMA / Lecture #3
9
Augmented Phillips and aggregate supply curves
Inflation
Inflation
B
AS
B
π
A C
U Unemployment (a) Phillips curve
π
A C
Output Y (b) Aggregate supply Figure 12.5
IAMA / Lecture #3
5. The AS-AD Model as a system of difference equations
• Solving the AS-AD model for the currentvalues: Substitution or matrix manipulation • Result: “Reduced form”: A vector-valued linear difference equation, a set of equations relating current values to their past plus exogenous influences • Still not a solution in the strict sense. We seek functions of time only
Inflation
IAMA / Lecture #3
0
Output gap (Y -Y )
15
5. The AS-AD Model as a system of difference equations
• Slutsky´s vision as a starting point • Role of economic theory for constructing the “black box” as well as identifying the shocks • Demonstration: AS-AD model • In case you don’t know about AS-AD…see e.g. Burda/Wyplosz Ch 12, 13 and 14, especially the appendix to Ch 14
Yt
πt
=
a1 a1b1 1 + a2 b1 (1 − λ ) 1− λ 1 1 a2 a2 b1 1− λ 1 b1 1− λ
− a2 1
Yt −1
π t −1
a2 b1 µ t 1 − λ dt − b1 st 1− λ Y t
21
+
1 + a2 b1 (1 − λ )
− a2 1− λ 1 1− λ
IAMA / Lecture #3 11
4. Bridge between classical and Keynesian views?
• In doing so, Friedman reintroduced a form of microeconomic foundations to the analysis of the supply side…. • …as well as Wicksell’s notion of “natural rate of unemployment” and “natural rate of interest” – and the long-run neutrality of money
IAMA / Lecture #3 5
4. Foundations of macro dynamics
• The first attempt was the Phillips Curve • It was mechanical, but correctly saw role of imbalances in labor market as a source of cost pressure which fed into price inflation • The Phillips Curve, combined with Okun's Law, closed the model • For at least two decades this was the way economists thought about inflation
IAMA / Lecture #3
3
2. Extensions of static models not covered in course
• Monetary wealth and the „real side“ (outside money) • Interest rates, wealth and labor supply • Variations of static Keynesian model • Open economy, „balance of payments approach“ (classical) and Mundell-Fleming (Keynesian) approaches
IAMA / Lecture #3 13
The long run
Inflation
Inflation Unemployment U (a) Phillips curve
Y Output (b) Aggregate supply
Figure 12.3
IAMA / Lecture #3
14
7
Fig. 13.10
Introduction to Advanced Macroeconomic Analysis (IAMA)
Lecture # 3 Ad hoc Dynamic Macroeconomics: The AS-AD Model
IAMA / Lecture #3 1
Summary
• Review of last time • Extensions of static models not covered in course • Macroeconomics as the study of aggregate dynamics • The foundations of macro dynamics • The AS-AD Model as a vehicle for learning about dynamics of deterministic and stochastic difference equations
IAMA / Lecture #3 2
1
1. Review of Last Time
• Comparative statics analysis: An important analytical tool • Analysis of the static classical model • Implications of Keynesian challenge • Analysis of the static Keynesian model
IAMA / Lecture #3 12
6
„The natural rate of unemployment...
...is the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demands and supplies, the costs of gathering information about job vacancies and labor availabilities, the costs of mobility, and so on.“ Milton Friedman (1968)