曼昆宏观经济学第七版讲义(4).ppt

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1、0CHAPTER 4 Money and InflationThe connection between money and pricesInflation rate=the percentage increase in the average level of prices.Price=amount of money required to buy a good.Because prices are defined in terms of money,we need to consider the nature of money,the supply of money,and how it

2、is controlled.1CHAPTER 4 Money and InflationMoney:DefinitionMoney is the stock of assets that can be readily used to make transactions.2CHAPTER 4 Money and InflationMoney:Functionsmedium of exchangewe use it to buy stuffstore of valuetransfers purchasing power from the present to the futureunit of a

3、ccountthe common unit by which everyone measures prices and values3CHAPTER 4 Money and InflationMoney:Types1.Fiat moneyhas no intrinsic valueexample:the paper currency we use2.Commodity moneyhas intrinsic valueexamples:gold coins,cigarettes in P.O.W.campsNOW YOU TRY:Discussion QuestionWhich of these

4、 are money?a.Currencyb.Checksc.Deposits in checking accounts(“demand deposits”)d.Credit cardse.Certificates of deposit(“time deposits”)5CHAPTER 4 Money and InflationThe money supply and monetary policy definitionsThe money supply is the quantity of money available in the economy.Monetary policy is t

5、he control over the money supply.6CHAPTER 4 Money and InflationThe central bankMonetary policy is conducted by a countrys central bank.In the U.S.,the central bank is called the Federal Reserve(“the Fed”).The Federal Reserve Building Washington,DCMoney supply measures,September 2010$8709M1+small tim

6、e deposits,savings deposits,money market mutual funds,money market deposit accountsM2$1766C+demand deposits,travelers checks,other checkable depositsM1$900CurrencyCamount($billions)assets includedsymbol8CHAPTER 4 Money and InflationThe Quantity Theory of MoneyA simple theory linking the inflation ra

7、te to the growth rate of the money supply.Begins with the concept of velocity9CHAPTER 4 Money and InflationVelocitybasic concept:the rate at which money circulatesdefinition:the number of times the average dollar bill changes hands in a given time periodexample:In 2009,$500 billion in transactionsmo

8、ney supply=$100 billionThe average dollar is used in five transactions in 2009So,velocity=510CHAPTER 4 Money and InflationVelocity,cont.This suggests the following definition:where V=velocityT=value of all transactionsM=money supply11CHAPTER 4 Money and InflationVelocity,cont.Use nominal GDP as a pr

9、oxy for total transactions.Then,where P=price of output (GDP deflator)Y=quantity of output(real GDP)P Y=value of output (nominal GDP)12CHAPTER 4 Money and InflationThe quantity equationThe quantity equationM V=P Yfollows from the preceding definition of velocity.It is an identity:it holds by definit

10、ion of the variables.13CHAPTER 4 Money and InflationMoney demand and the quantity equationM/P=real money balances,the purchasing power of the money supply.A simple money demand function:(M/P)d=k Ywherek=how much money people wish to hold for each dollar of income.(k is exogenous)14CHAPTER 4 Money an

11、d InflationMoney demand and the quantity equationmoney demand:(M/P)d=k Y quantity equation:M V=P YThe connection between them:k=1/VWhen people hold lots of money relative to their incomes(k is large),money changes hands infrequently(V is small).15CHAPTER 4 Money and InflationBack to the quantity the

12、ory of moneystarts with quantity equationassumes V is constant&exogenous:Then,quantity equation becomes:16CHAPTER 4 Money and InflationThe quantity theory of money,cont.How the price level is determined:With V constant,the money supply determines nominal GDP(P Y).Real GDP is determined by the econom

13、ys supplies of K and L and the production function(Chap 3).The price level is P=(nominal GDP)/(real GDP).17CHAPTER 4 Money and InflationThe quantity theory of money,cont.Recall from Chapter 2:The growth rate of a product equals the sum of the growth rates.The quantity equation in growth rates:18CHAP

14、TER 4 Money and InflationThe quantity theory of money,cont.(Greek letter“pi”)denotes the inflation rate:The result from the preceding slide:Solve this result for:19CHAPTER 4 Money and InflationThe quantity theory of money,cont.Normal economic growth requires a certain amount of money supply growth t

15、o facilitate the growth in transactions.Money growth in excess of this amount leads to inflation.20CHAPTER 4 Money and InflationThe quantity theory of money,cont.Y/Y depends on growth in the factors of production and on technological progress(all of which we take as given,for now).Hence,the Quantity

16、 Theory predicts a one-for-one relation between changes in the money growth rate and changes in the inflation rate.21CHAPTER 4 Money and InflationConfronting the quantity theory with dataThe quantity theory of money implies:1.Countries with higher money growth rates should have higher inflation rate

17、s.2.The long-run trend behavior of a countrys inflation should be similar to the long-run trend in the countrys money growth rate.Are the data consistent with these implications?International data on inflation and money growthMoney supply growth(percent,logarithmic scale)SingaporeEcuadorTurkeyBelaru

18、sArgentinaIndonesiaU.S.inflation and money growth,1960-2010M2 growth rateinflation rateU.S.inflation and money growth,1960-2010Inflation and money growth have the same long-run trends,as the Quantity Theory predicts.25CHAPTER 4 Money and InflationSeigniorageTo spend more without raising taxes or sel

19、ling bonds,the govt can print money.The“revenue”raised from printing money is called seigniorage (pronounced SEEN-your-idge).The inflation tax:Printing money to raise revenue causes inflation.Inflation is like a tax on people who hold money.26CHAPTER 4 Money and InflationInflation and interest rates

20、Nominal interest rate,inot adjusted for inflationReal interest rate,radjusted for inflation:r =i 27CHAPTER 4 Money and InflationThe Fisher effectThe Fisher equation:i =r +Chap 3:S =I determines r.Hence,an increase in causes an equal increase in i.This one-for-one relationship is called the Fisher ef

21、fect.U.S.inflation and nominal interest rates,1960-2010inflation ratenominal interest rateInflation and nominal interest rates across countriesNominal interest rate(percent,logarithmic scale)Inflation rate(percent,logarithmic scale)ZimbabweRomaniaTurkeyBrazilIsraelU.S.GermanyEthiopiaKenyaGeorgiaNOW

22、YOU TRY:Applying the theorySuppose V is constant,M is growing 5%per year,Y is growing 2%per year,and r =4.a.Solve for i.b.If the Fed increases the money growth rate by 2 percentage points per year,find i.c.Suppose the growth rate of Y falls to 1%per year.What will happen to?What must the Fed do if i

23、t wishes to keep constant?NOW YOU TRY:Answersa.First,find =5 2=3.Then,find i =r+=4+3=7.b.i =2,same as the increase in the money growth rate.c.If the Fed does nothing,=1.To prevent inflation from rising,Fed must reduce the money growth rate by 1 percentage point per year.V is constant,M grows 5%per y

24、ear,Y grows 2%per year,r =4.32CHAPTER 4 Money and InflationTwo real interest ratesNotation:=actual inflation rate (not known until after it has occurred)E =expected inflation rateTwo real interest rates:i E =ex ante real interest rate:the real interest rate people expect at the time they buy a bond

25、or take out a loani =ex post real interest rate:the real interest rate actually realized33CHAPTER 4 Money and InflationMoney demand and the nominal interest rateIn the quantity theory of money,the demand for real money balances depends only on real income Y.Another determinant of money demand:the no

26、minal interest rate,i.the opportunity cost of holding money(instead of bonds or other interest-earning assets).Hence,i in money demand.34CHAPTER 4 Money and InflationThe money demand function(M/P)d =real money demand,dependsnegatively on i i is the opp.cost of holding moneypositively on Y higher Y m

27、ore spending so,need more money(“L”is used for the money demand function because money is the most liquid asset.)35CHAPTER 4 Money and InflationThe money demand functionWhen people are deciding whether to hold money or bonds,they dont know what inflation will turn out to be.Hence,the nominal interes

28、t rate relevant for money demand is r +E.36CHAPTER 4 Money and InflationEquilibriumThe supply of real money balancesReal money demand37CHAPTER 4 Money and InflationWhat determines whatvariablehow determined(in the long run)Mexogenous(the Fed)radjusts to ensure S=IY P adjusts to ensure38CHAPTER 4 Mon

29、ey and InflationHow P responds to MFor given values of r,Y,and E ,a change in M causes P to change by the same percentage just like in the quantity theory of money.39CHAPTER 4 Money and InflationWhat about expected inflation?Over the long run,people dont consistently over-or under-forecast inflation

30、,so E =on average.In the short run,E may change when people get new information.EX:Fed announces it will increase M next year.People will expect next years P to be higher,so E rises.This affects P now,even though M hasnt changed yet.40CHAPTER 4 Money and InflationHow P responds to E For given values

31、 of r,Y,and M,NOW YOU TRY:Discussion QuestionWhy is inflation bad?What costs does inflation impose on society?List all the ones you can think of.Focus on the long run.Think like an economist.42CHAPTER 4 Money and InflationA common misperceptionCommon misperception:inflation reduces real wagesThis is

32、 true only in the short run,when nominal wages are fixed by contracts.(Chap.3)In the long run,the real wage is determined by labor supply and the marginal product of labor,not the price level or inflation rate.Consider the dataThe CPI and Average Hourly Earnings,1965-20091965=100Hourly wage in May 2

33、009 dollars$0$5$10$15$2001002003004005006007008009001965197019751980198519901995200020052010CPI(1965=100)Nominal average hourly earnings,(1965=100)Real average hourly earnings in 2009 dollars,right scale44CHAPTER 4 Money and InflationThe classical view of inflationThe classical view:A change in the

34、price level is merely a change in the units of measurement.Then,why is inflation a social problem?45CHAPTER 4 Money and InflationThe social costs of inflationfall into two categories:1.costs when inflation is expected2.costs when inflation is different than people had expected 46CHAPTER 4 Money and

35、InflationThe costs of expected inflation:1.Shoeleather costdef:the costs and inconveniences of reducing money balances to avoid the inflation tax.i real money balancesRemember:In long run,inflation does not affect real income or real spending.So,same monthly spending but lower average money holdings

36、 means more frequent trips to the bank to withdraw smaller amounts of cash.47CHAPTER 4 Money and InflationThe costs of expected inflation:2.Menu costsdef:The costs of changing prices.Examples:cost of printing new menuscost of printing&mailing new catalogsThe higher is inflation,the more frequently f

37、irms must change their prices and incur these costs.48CHAPTER 4 Money and InflationThe costs of expected inflation:3.Relative price distortionsFirms facing menu costs change prices infrequently.Example:A firm issues new catalog each January.As the general price level rises throughout the year,the fi

38、rms relative price will fall.Different firms change their prices at different times,leading to relative price distortionscausing microeconomic inefficiencies in the allocation of resources.49CHAPTER 4 Money and InflationThe costs of expected inflation:4.Unfair tax treatmentSome taxes are not adjuste

39、d to account for inflation,such as the capital gains tax.Example:Jan 1:you buy$10,000 worth of IBM stockDec 31:you sell the stock for$11,000,so your nominal capital gain is$1000(10%).Suppose =10%during the year.Your real capital gain is$0.But the govt requires you to pay taxes on your$1000 nominal g

40、ain!50CHAPTER 4 Money and InflationThe costs of expected inflation:5.General inconvenienceInflation makes it harder to compare nominal values from different time periods.This complicates long-range financial planning.51CHAPTER 4 Money and InflationAdditional cost of unexpected inflation:Arbitrary re

41、distribution of purchasing powerMany long-term contracts not indexed,but based on E .If turns out different from E ,then some gain at others expense.Example:borrowers&lenders If E ,then (i )(i E )and purchasing power is transferred from lenders to borrowers.If E ,then purchasing power is transferred

42、 from borrowers to lenders.52CHAPTER 4 Money and InflationAdditional cost of high inflation:Increased uncertaintyWhen inflation is high,its more variable and unpredictable:turns out different from E more often,and the differences tend to be larger(though not systematically positive or negative)Arbit

43、rary redistributions of wealth become more likely.This creates higher uncertainty,making risk averse people worse off.53CHAPTER 4 Money and InflationOne benefit of inflationNominal wages are rarely reduced,even when the equilibrium real wage falls.This hinders labor market clearing.Inflation allows

44、the real wages to reach equilibrium levels without nominal wage cuts.Therefore,moderate inflation improves the functioning of labor markets.54CHAPTER 4 Money and InflationHyperinflationCommon definition:50%per monthAll the costs of moderate inflation described above become HUGE under hyperinflation.

45、Money ceases to function as a store of value,and may not serve its other functions(unit of account,medium of exchange).People may conduct transactions with barter or a stable foreign currency.55CHAPTER 4 Money and InflationWhat causes hyperinflation?Hyperinflation is caused by excessive money supply

46、 growth:When the central bank prints money,the price level rises.If it prints money rapidly enough,the result is hyperinflation.A few examples of hyperinflationcountryperiodCPI Inflation%per yearM2 Growth%per yearIsrael1983-85338%305%Brazil1987-941256%1451%Bolivia1983-861818%1727%Ukraine1992-942089%

47、1029%Argentina1988-902671%1583%Dem.Republic of Congo/Zaire1990-963039%2373%Angola1995-964145%4106%Peru1988-905050%3517%Zimbabwe2005-075316%9914%57CHAPTER 4 Money and InflationWhy governments create hyperinflationWhen a government cannot raise taxes or sell bonds,it must finance spending increases by

48、 printing money.In theory,the solution to hyperinflation is simple:stop printing money.In the real world,this requires drastic and painful fiscal restraint.58CHAPTER 4 Money and InflationThe Classical DichotomyReal variables:Measured in physical units quantities and relative prices,for example:quant

49、ity of output producedreal wage:output earned per hour of workreal interest rate:output earned in the future by lending one unit of output todayNominal variables:Measured in money units,e.g.,nominal wage:Dollars per hour of work.nominal interest rate:Dollars earned in future by lending one dollar to

50、day.the price level:The amount of dollars needed to buy a representative basket of goods.59CHAPTER 4 Money and InflationThe Classical DichotomyNote:Real variables were explained in Chap 3,nominal ones in Chapter 4.Classical dichotomy:the theoretical separation of real and nominal variables in the cl