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1、Chapter 27Money and Inflation 2005 Pearson Education Canada Inc.Money and Inflation:The Evidence“Inflation is Always and Everywhere a Monetary Phenomenon”(M.Friedman)EvidenceIn every case when high for sustained period,M growth is highExamples:1.Latin American inflations2.German Hyperinflation,19212
2、3Controlled experiment,particularly after 1923 invasion of Ruhrgovernment prints money to pay strikers,1 million%Meaning of“inflation”Friedmans statement uses definition of as continuing,rapidly rising price level:Only then does evidence support it 2005 Pearson Education Canada Inc.2German Hyperinfl
3、ation:1921233 2005 Pearson Education Canada Inc.Response to Continually Rising MsMonetarist and Keynesian View1.M continually,shifts AD to right from AD1 to AD2 to AD3,etc.2.Y Yn,wages,AS shifts to left from AS1 to AS2 to AS3,etc.3.P continually rises from P1 to P2 to P3,etc.:i.e.,have inflation 200
4、5 Pearson Education Canada Inc.4Monetarist and Keynesian Views of Monetarist ViewOnly source of AD shifts and in Figure 2 can be Ms growthKeynesian ViewAllows for other sources of AD shifts,but comes to same conclusion that only source of sustained high is Ms growth1.Figure 3 shows that fiscal polic
5、y without Ms growth only causes P,but not sustained 2.Figure 4 shows that supply shock does not lead to sustained 2005 Pearson Education Canada Inc.5Response to One-Shot Increase in GG permanently1.AD shifts right to AD22.Y Yn,AS shifts in to AS23.P to P2,but doesnt keep rising 2005 Pearson Educatio
6、n Canada Inc.6Response to Supply ShockNegative Supply Shock1.AS shifts in to AS22.Y Yn,wages,AS shifts back to AS13.P unchanged,no 7 2005 Pearson Education Canada Inc.Cost-Push InflationHigh Employment Target at Yn1.Workers raise wages because either:want higher real wages or e high2.AS shifts in3.Y
7、 Yn1.Y=Yn Yn,AS shifts in3.Y=Yn YT,government shifts AD out,and repeat steps 2 and 3,etc.4.P continually:i.e.,get 9 2005 Pearson Education Canada Inc.Budget Deficits and Government Budget ConstraintDEF=G T=MB+B1.Deficit financed by bonds,no effect on MB and Ms2.Deficit not financed by bonds,MB and M
8、s Financing persistent budget deficit by money creation leads to sustained 1.Deficit financed by Ms leads to AD shifts out,as in Fig 27.22.If deficit persists,Ms continually and get P continually,i.e.,as in Fig 27.2Conclusion:Deficit ,only if it is1.Persistent2.Financed by money creation rather than
9、 by bonds10 2005 Pearson Education Canada Inc.Budget Deficits and Budget deficits in other countries1.Bond finance hard2.Deficit likely to lead to money creation and Budget deficits in U.S.1.Large capital market,so can bond finance2.Fed has choice whether to monetize deficit,but may be pressured to
10、do so3.Ricardian equivalence may mean no effect of budget deficits on interest ratesConclusion:Deficits do not necessarily 11 2005 Pearson Education Canada Inc.Budget Deficits and Interest Rates12 2005 Pearson Education Canada Inc.Inflation and Money Growth1.Money and inflation relationship close un
11、til 19802.After 1980 relationship breaks down13Government Debt to GDP1.Debt/GDP falls 1960802.Deficits cant be source of money creation and 14 2005 Pearson Education Canada Inc.Unemployment and the Natural Rate of UnemploymentHigh employment targets source of 1960-801.U Yn2.U Un 1974-80 suggests cos
12、t-push 3.U Un and after 1980 2005 Pearson Education Canada Inc.15Activist/Nonactivist Debate 2005 Pearson Education Canada Inc.16Activist/Nonactivist DebateCase for nonactivist policy stronger if expectations of policy matter1.Economy wont stop at point 22.Wages,AS shifts in,Y Yn,AD shifted out,etc.
13、:3.Also less likely for wage push that gets us to 1Quite plausible that expectations of policy matter to wage settingRules vs Discretion1.Nonactivists advocate policy rule to keep AD from fluctuating:Example:Monetarist constant-money-growth-rate-rule2.Credibility of nonaccommodating policy helps avo
14、id wage push and helps prevent and unemploymentExample:1.In the period from 1965 through the 1970s,the Bank of Canada had low credibility and anti-policy was costly2.Credibility earned by 19833.When money growth 1983,little rise in wages and 2005 Pearson Education Canada Inc.17Choice Between Activist and Nonactivist Policy18 2005 Pearson Education Canada Inc.