曼昆第10版课件mankiw10e-lecture-slides-ch05

Inflation:ItsCauses,Effects,andSocialCostsMacroeconomicsN.GregoryMankiw©2019WorthPublishers,allrightsreservedINTHISCHAPTER,YOUWILLLEARN:TheclassicaltheoryofinflationCausesEffectssocialcosts“Classical”—assumespricesareflexibleandmarketsclearAppliestothelongrunU.S.inflationanditstrend,1960–2014,part1U.S.inflationanditstrend,1960–2014,part2ThequantitytheoryofmoneyAsimpletheorylinkingtheinflationratetothegrowthrateofthemoneysupply.Beginswiththeconceptofvelocity…Velocity,part1Basicconcept:therateatwhichmoneycirculatesDefinition:thenumberoftimestheaveragedollarbillchangeshandsinagiventimeperiodExample:In2018,$500billionintransactionsmoneysupply=$100billionTheaveragedollarisusedinfivetransactionsin2018So,velocity=5Velocity,part2Thissuggeststhefollowingdefinition:whereV

=velocityT

=valueofalltransactionsM

=moneysupplyVelocity,part3UsenominalGDPasaproxyfortotaltransactions.Then,whereP=priceofoutput(GDPdeflator)Y=quantityofoutput(realGDP)P×Y

=valueofoutput(nominalGDP)ThequantityequationThequantityequation

M×V=P×Yfollowsfromtheprecedingdefinitionofvelocity.Itisanidentity:itholdsbydefinitionofthevariables.Moneydemandandthequantityequation,part1M/P=realmoneybalances,thepurchasingpowerofthemoneysupply.Asimplemoneydemandfunction:(M/P)d=k

Y

where

k=howmuchmoneypeoplewishtoholdforeachdollarofincome.(kisexogenous)Moneydemandandthequantityequation,part2Moneydemand:(M/P)d

=k

Y

Quantityequation:M×V=P×YTheconnectionbetweenthem:k=1/VWhenpeopleholdlotsofmoneyrelative

totheirincomes(kislarge),moneychangeshandsinfrequently(V

issmall).BacktothequantitytheoryofmoneyStartswithquantityequationAssumesVisconstantandexogenous:Then,thequantityequationbecomes:Thequantitytheoryofmoney,part1Howthepricelevelisdetermined:WithVconstant,themoneysupplydeterminesnominalGDP(P×Y).RealGDPisdeterminedbytheeconomy’ssuppliesofKandLandtheproductionfunction(Chapter3).ThepricelevelisP

=(nominalGDP)/(realGDP).Thequantitytheoryofmoney,part2RecallfromChapter2:

Thegrowthrateofaproductequalsthesumofthegrowthrates.Thequantityequationingrowthrates:Thequantitytheoryofmoney,part3π(Greekletterpi)denotestheinflationrate:Theresultfromtheprecedingslide:Solvethisresultforπ:Thequantitytheoryofmoney,part4Normaleconomicgrowthrequiresacertainamountofmoneysupplygrowthtofacilitatethegrowthintransactions.Moneygrowthinexcessofthisamountleadstoinflation.Thequantitytheoryofmoney,part5ΔY/Ydependsongrowthinthefactorsofproductionandontechnologicalprogress(allofwhichwetakeasgiven,fornow).Hence,thequantitytheorypredictsaone-for-onerelationshipbetweenchangesinthemoneygrowthrateandchangesintheinflationrate.ConfrontingthequantitytheorywithdataThequantitytheoryofmoneyimplies:1. Countrieswithhighermoneygrowthrates

shouldhavehigherinflationrates.2. Thelong-runtrendinacountry’sinflationrateshouldbesimilartothelong-runtrendinthecountry’smoneygrowthrate.Arethedataconsistentwiththeseimplications?InternationaldataoninflationandmoneygrowthU.S.inflationandmoneygrowth,1960–2014,part1U.S.inflationandmoneygrowth,1960–2014,part2Inflationandmoneygrowth

havethesamelong-runtrendsasthequantitytheorypredicts.SeigniorageTospendmorewithoutraisingtaxesorsellingbonds,thegovernmentcanprintmoney.The“revenue”raisedfromprintingmoneyiscalledseigniorage(pronouncedSEEN-your-idge).Theinflationtax:

Printingmoneytoraiserevenuecausesinflation.Inflationislikeataxonpeoplewhoholdmoney.InflationandinterestratesNominalinterestrate,InotadjustedforinflationRealinterestrate,r

adjustedforinflation:r

=i

−πTheFishereffectTheFisherequation:

i=r+πChapter3:S=Ideterminesr

.Hence,anincreaseinπcausesanequalincreaseini.Thisone-for-onerelationshipiscalledtheFishereffect.U.S.inflationandnominalinterestrates,1955-2015Inflationandnominalinterestratesin48countriesNOWYOUTRY

ApplyingthetheorySupposeVisconstant,Misgrowing5%peryear,Yisgrowing2%peryear,andr=4.Solvefori.IftheFedincreasesthemoneygrowthrateby

2percentagepointsperyear,findΔi.SupposethegrowthrateofYfallsto1%peryear.Whatwillhappentoπ?WhatmusttheFeddoifitwishesto

keepπconstant?NOWYOUTRY

Applyingthetheory,answersVisconstant,Mgrows5%peryear,Y

grows2%peryear,r=4.First,findπ=5−2=3.Then,findi=r+π=4+3=7.Δi=2,thesameastheincreaseinthemoneygrowthrate.IftheFeddoesnothing,Δπ=1.Topreventinflationfromrising,theFedmustreducethemoneygrowthrateby1percentagepointperyear.TworealinterestratesNotation:π

=actualinflationrate(notknownuntilafterithasoccurred)Eπ=expectedinflationrateTworealinterestrates:i–Eπ=exanterealinterestrate:

therealinterestratepeopleexpectatthetimetheybuyabondortakeoutaloani–π=expost

realinterestrate:

therealinterestrateactuallyrealizedMoneydemandandthenominalinterestrateInthequantitytheoryofmoney,thedemandforrealmoneybalancesdependsonlyonrealincomeY.Anotherdeterminantofmoneydemand:

thenominalinterestratei.theopportunitycostofholdingmoney(insteadofbondsorotherinterest-earningassets).So,moneydemanddependsnegativelyoni.Themoneydemandfunction,part1(M/P

)d=realmoneydemand,dependsnegativelyoniiistheoppositecostofholdingmoneypositivelyonYhigherY

increasesspendingong&ssoincreasestheneedformoney(Lisusedforthemoneydemandfunctionbecausemoneyisthemostliquidasset.)Themoneydemandfunction,part2Whenpeoplearedecidingwhethertoholdmoneyorbonds,theydon’tknowwhatinflationwillturnouttobe.Hence,thenominalinterestraterelevantformoneydemandisr+Eπ.EquilibriumWhatdetermineswhat?HowPrespondstoΔMForgivenvaluesofr,Y,andEπ

,achangeinMcausesPtochangebythesamepercentage—justlikeinthequantitytheoryofmoney.Whataboutexpectedinflation?Overthelongrun,peopledon’tconsistentlyover-orunder-forecastinflation,

soEπ

=πonaverage.Intheshortrun,Eπ

maychangewhenpeoplegetnewinformation.Example:TheFedannouncesitwillincreaseMnextyear.Peoplewillexpectnextyear’sPtobehigher,soEπrises.ThisaffectsPnow,eventhoughMhasn’tchangedyet...How

P

respondstoΔEπForgivenvaluesofr,Y,andM,TheclassicalviewofinflationTheclassicalview:

Achangeinthepricelevelismerelyachangeintheunitsofmeasurement.Then,whyisinflationasocialproblem?NOWYOUTRY

DiscussionquestionWhyisinflationbad?Whatcostsdoesinflationimposeonsociety?Listallthecostsyoucanthinkof.Focusonthelongrun.Thinklikeaneconomist.AcommonmisperceptionCommonmisperception:

inflationreducesrealwagesThisistrueonlyintheshortrun,whennominalwagesarefixedbycontracts.(Chapter3)Inthelongrun,therealwageisdeterminedbylaborsupplyandthemarginalproductoflabor,notthepricelevelorinflationrate.Considerthedata...TheCPIandaveragehourlyearnings,1965–2015Thesocialcostsofinflation…fallintotwocategories:costswheninflationisexpectedcostswheninflationisdifferentfromwhatpeoplehadexpectedThecostsofexpectedinflation:1.ShoeleathercostDefinition:thecostsandinconveniencesofreducingmoneybalancestoavoidtheinflationtax.Ifπincreases,iincreases(why?),

sopeoplereducetheirrealmoneybalances.Remember:Inlongrun,inflationdoesnot

affectrealincomeorrealspending.Thesamemonthlyspendingbutloweraveragemoneyholdingsmeansmorefrequenttripstothebanktowithdrawsmalleramountsofcash.Thecostsofexpectedinflation:2.MenucostsDefinition:thecostsofchangingprices.Examples:costofprintingnewmenusandmailingoutcatalogstimespenttryingtodecideonwhatthenewpricesshouldbeThehigherisinflation,themorefrequentlyfirmsmustchangetheirpricesandincurthesecosts.Thecostsofexpectedinflation:3.RelativepricedistortionsFirmsfacingmenucostschangepricesinfrequently.Example:

AfirmissuesnewcatalogeachJanuary.

Asthegeneralpricelevelrisesthroughouttheyear,thefirm’srelativepricewillfall.Differentfirmschangetheirpricesatdifferenttimes,leadingtorelativepricedistortions......causingmicroeconomicinefficienciesintheallocationofresources.Thecostsofexpectedinflation:4.UnfairtaxtreatmentSometaxes,suchasthecapitalgainstax,arenotadjustedtoaccountforinflation.Example:Jan1:youbuy$10,000worthofApplestockDec31:yousellthestockfor$11,000,

soyournominalcapitalgainis$1,000(10%).Supposeπ=10%duringtheyear.

Yourrealcapitalgainis$0.Yet,youmustpaytaxesonyour$1,000nominalgain!Thecostsofexpectedinflation:5.GeneralinconvenienceInflationmakesithardertocomparenominalvaluesfromdifferenttimeperiods.Thiscomplicateslong-rangefinancialplanning.Thecostsofunexpectedinflation:ArbitraryredistributionofpurchasingpowerManylong-termcontractsarenotindexed

butarebasedonEπ.IfπturnsouttobedifferentfromEπ,thensomegainatothers’expense.Example:borrowersandlendersIfπ>Eπ,then(i

−π)<(i

−

Eπ

)

andpurchasingpoweristransferredfromlenderstoborrowers.Ifπ<E

π,thenpurchasingpoweristransferredfromborrowerstolenders.Additionalcostofhighinflation:IncreaseduncertaintyWheninflationishigh,it’smorevariableandunpredictable:π

turnsoutdifferentfromEπmoreoften,

andthedifferencestendtobelarger,thoughnotsystematicallypositiveornegative.So,arbitraryredistributionsofwealtharemorelikely.Thisincreasesuncertainty,makingrisk-aversepeopleworseoff.OnebenefitofinflationNominalwagesarerarelyreduced,evenwhentheequilibriumrealwagefalls.Thishinderslabormarketclearing.Inflationallowstherealwagestoreachequilibriumlevelswithoutnominalwagecuts.Therefore,moderateinflationimprovesthefunctioningoflabormarkets.HyperinflationCommondefinition:π

≥50%permonthAllthecostsofmoderateinflationdescribed

abovebecomeHUGE

underhyperinflation.Moneyceasestofunctionasastoreofvalue,anditmaynotserveitsotherfunctions(unitofaccount,mediumofexchange).Peoplemayconducttransactionswithbarterorastableforeigncurrency.Whatcauseshyperinflation?Hyperinflationiscausedbyexcessivemoneysupplygrowth.Whenthecentralbankprintsmoney,thepricelevelrises.Ifitprintsmoneyrapidlyenough,theresultishyperinflation.AfewexamplesofhyperinflationCountryPeriodCPIinflation%peryearM2growth%peryearIsrael1983-85338%305%Brazil1987-941,2561,451Bolivia1983-861,8181,727Ukraine1992-942,0891,029Argentina1988-902,6711,583Dem.RepublicofCongo/Zaire1990-963,0392,373Angola1995-964,1454,106Peru1988-905,0503,517Zimbabwe2005-075,3169,914WhygovernmentscreatehyperinflationWhenagovernmentcannotraisetaxesorsellbonds,itmustfinancespendingincreasesbyprintingmoney.Intheory,thesolutiontohyperinflationissimple:stopprintingmoney.Intherealworld,thisrequiresdrasticandpainfulfiscalrestraint.Theclassicaldichotomy,part1Realvariables:

measuredinphysicalunits—quantitiesandrelativeprices,forexample:quantityofoutputproducedrealwage:outputearnedperhourofworkrealinterestrate:outputearnedinthefuture

bylendingoneunitofoutputtodayTheclassicaldichotomy,part2Nominalvariables:

measuredinmoneyunits—forexample:nominalwage:dollarsperhourofworknominalinterestrate:dollarsearnedinthefuture

bylendingonedollartodaypricelevel:numberofdollarsneeded

tobuyarepresentativebasketofgoodsTheclassicaldichotomy,part3Recall:RealvariableswereexplainedinChapter3,nominalonesinChapter5.Classicaldichotomy:thetheoreticalseparationofrealandnominalvariablesintheclassicalmodel,whichimpliesnominalvariablesdonotaffectrealvariables.Neutralityofmoney:ideathatchangesinthemoneysupplydonotaffectrealvariables.Intherealworld,moneyisapproximatelyneutralinthelongrun.CHAPTERSUMMARY,PART1Velocity:theratioofnominalexpenditure