Chapter 24 Money and Inflation. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-2...
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Transcript of Chapter 24 Money and Inflation. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-2...
Chapter 24
Money and Inflation
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-2
Money and Inflation: Evidence
• Inflation is always and everywhere a monetary phenomenon
• Whenever a country’s inflation rate is extremely high for a sustained period of time, its rate of money supply growth is also extremely high
• Reduced-form evidence
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-3
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-4
Views of Inflation
• Money Growth
• Fiscal Policy
• Supply Shocks
• Always a monetary phenomenon
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-5
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-6
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-7
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-8
Origins of Inflationary Monetary Policy
• Cost-push inflation Cannot occur without monetary authorities
pursuing an accommodating policy
• Demand-pull inflation
• Budget deficits Can be the source only if the deficit is
persistent and is financed by creating money rather than by issuing bonds
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-9
Origins of Inflationary Monetary Policy (cont’d)
• Two underlying reasons Adherence of policymakers to a high
employment target
Presence of persistent government budget deficits
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-10
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-11
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-12
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-13
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-14
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-15
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-16
Activist/Nonactivist Policy Debate
• Activists view self-correcting mechanism as slow
• Policy lags slow activist policy Data lag Recognition lag Legislative lag Implementation lag Effectiveness lag
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-17
Activist/Nonactivist Policy Debate (cont’d)
• Nonactivists believe government should not get involved Activist accommodating policy produces
volatility in both the price level and output
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-18
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 24-19
Expectations and the Activist/Nonactivist Debate
• If expectations about policy matter the accommodating, activist policy with high employment targets may lead to inflation
• Nonactivist policy may prevent inflation and discourage leftward shifts in short-run aggregate supply that lead to excessive unemployment Must be credible
• Constant-money-growth-rate rule