1、 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,2 of 31,Output, Unemployment,and Inflation,This chapter characterizes the economy by three relations: Okuns Law, which relates the change in unemployment to output growth. The Phillips curve, which relates the changes in i

2、nflation to unemployment. The aggregate demand relation, which relates output growth to both nominal money growth and inflation.,9-1, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,3 of 31,Okuns Law,According to the equation above, the change in the unemployment rate sh

3、ould be equal to the negative of the growth rate of output. For example, if output growth is 4%, then the unemployment rate should decline by 4%. Note : This equation is derived from following two convenient but restrictive assumption : Output moved one for one with employment ,ie. Y=N; Labor force

4、was constant ,so changes in employment was reflected on efor one in opposite changes in unemployment., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,4 of 31,Okuns Law,The actual relation between output growth and the change in the unemployment rate is known as Okuns la

5、w. Using thirty years of data in the united states , the relation that best fits the data is given by:, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,5 of 31,This equation differs from prior equation in two ways : A. It considers factors such as labor force growth and

6、labor productivity growth ,3%.It implies that just to maintain a constant unemployment rate ,output growth must be equal to the sum of labor force growth and labor productivity growth., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,6 of 31,Okuns Law,High output growth

7、is associated with a reduction in the unemployment rate; low output growth is associated with an increase in the unemployment rate.,Changes in the Unemployment Rate Versus Output Growth in the United States since 1970,Figure 9 - 1, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier B

8、lanchard,7 of 31,Okuns Law,According to the equation above,To maintain the unemployment rate constant, output growth must be 3% per year. This growth rate of output is called the normal growth rate., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,8 of 31,Okuns Law,B. Th

9、e coefficient on the right is -0.4 rather -0.1. According to the equation above, output growth 1% above normal leads only to a 0.4% reduction in unemployment, for two reasons:,Labor hoarding: firms adjust employment less than one for one in response of output growth from normal .Firms prefer to keep

10、 workers rather than lay them off when output decreases. An increase in the unemployment rate does not lead to a one for one decrease in the employment rate. When employment increases, not all new jobs are filled by the unemployed, also by out of the labor force . A 0.6% increase in the employment r

11、ate leads to only a 0.4% decrease in the unemployment rate., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,9 of 31,Okuns Law,Using letters rather than numbers:,Output growth above (below) normal leads to a decrease (increase) in the unemployment rate. This is Okuns law

12、:, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,10 of 31,Okuns Law Across Countries,The coefficient in Okuns law gives the effect on the unemployment rate of deviations of output growth from normal. A value of of 0.4 tells us that output growth 1% above the normal gro

13、wth rate for 1 year decreases the unemployment rate by 0.4%., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,11 of 31,The Phillips Curve,Inflation depends on expected inflation and on the deviation of unemployment from the natural rate of unemployment. When et is well a

14、pproximated by t-1, then:,According to the Phillips curve, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,12 of 31,The Aggregate Demand Relation,The aggregate demand relation, as stated in chapter 7, adding the time indices:,To focus on the relation between the real mon

15、ey stock and output ,here we ignoring changes in output caused by other than changes in the real money stock, then:, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,13 of 31,The Aggregate Demand Relation,Keep in mind this simple relation hides the mechanism you saw in th

16、e IS-LM model: An increase in the real money stock leads to a decrease in the interest rate. The decrease in the interest rate leads to an increase in the demand for goods and therefore, to an increase in output., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,14 of 31,

17、From the relation that above equation gives , we can derive another relation between growth rates- the growth rate of out put, gyt, the growth rate money ,gmt, and the inflation rate (the growth rate of price level .) ,t., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,

18、15 of 31,The Effects of Money Growth,Okuns law relates the change in the unemployment rate to the deviation of output growth from normal: The Phillips curve relates the change in inflation to the deviation of the unemployment rate from the natural rate: The aggregate demand relation relates output g

19、rowth to the difference between nominal money growth and inflation.,9-2, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,16 of 31,The Effects of Money Growth,Figure 9 - 2,Output Growth, Unemployment, Inflation, and Nominal Money Growth, 2006 Prentice Hall Business Publis

20、hing Macroeconomics, 4/e Olivier Blanchard,17 of 31,The Medium Run,To see what these three relations imply for the effects of nominal money growth on output unemployment and inflation ,the easiest way to proceed is to work backward in time .That is , to start by looking at medium run -where the econ

21、omy end up when all the dynamics have worked themselves out ,and then turn to the dynamics themselves , i.e., how the economy get there ., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,18 of 31,The Medium Run,Assume that the central bank maintains a constant growth rat

22、e of nominal money, call it . In this case, what will be the values of output growth, unemployment, and inflation in the medium run?, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,19 of 31,In the medium run , the unemployment rate must be constant , Then according Okun

23、s law, the output must grow at its normal rate of growth, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,20 of 31,In the medium run , according the aggregate demand relation ,the inflation must be equal to nominal money growth minus normal out put growth . If we define

24、adjusted nominal money growth as equal to nominal money growth minus normal output growth, so in the medium run , inflation equals adjusted nominal money growth., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,21 of 31,If inflation is constant - equals adjusted nominal

25、money growth ,according to the phillips curve ,the unemployment rate must equal to the natural rate of unemployment., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,22 of 31,Lets summarize: In the medium run ,output is equal to the normal growth rate ; unemployment is e

26、qual to the natural rate ,both of them are independent of nominal money growth . So nominal money growth affects only inflation -changes in the level of nominal money are neutral in the medium run, which are reflected one for one in changes in the rate of inflation . “Inflation is always and everywh

27、ere a monetary phenomenon.”_ Milton friedman, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,23 of 31,The Short Run,Lets now turn to dynamics beginning with the assumption that the economy is initially at its medium run equilibrium. Suppose that the central bank decides

28、 to decrease nominal money growth. What will happen in the short run? First, given the initial rate of inflation, then according to the AD relation ,lower nominal money growth leads to lower real nominal money growth , and thus leads to a decrease in output growth-below the natural growth rate ., 20

29、06 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,24 of 31,Second , according to Okuns law, when output growth is below normal rate leads to an increase in unemployment. Third ,according to the Phillips curve relation, when Unemployment rate is above the natural rate leads t

30、o a decrease in inflation. So tighter monetary policy leads initially to a recession and lower inflation., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,25 of 31,Working Out the Pathof Nominal Money Growth,This table shows the path of nominal money growth needed to ach

31、ieve 10% disinflation over five years., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,26 of 31,Working Out the Pathof Nominal Money Growth,This figure shows the path of unemployment and inflation implied by the disinflation path in Table 9-1.,Five years of unemployment

32、 above the natural rate of unemployment lead to a permanent decrease in inflation.,A Disinflation Path, 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,27 of 31,Disinflation,9-3,We know from the previous section that lower inflation requires lower money growth. We also k

33、now that lower money growth implies an increase in unemployment for some time. Now we discuss at what pace the central bank should proceed., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,28 of 31,A First Pass,In the Phillips curve relation above, disinflationa decrease

34、 in inflation ratecan be obtained only at the cost of higher unemployment. (note :deflationdecrease in the price level ,equivalent negative inflation ),A point-year of excess unemployment is a difference between the actual and the natural unemployment rate of one percentage point for one year., 2006

35、 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,29 of 31,A First Pass,For example, lets assume that =1 Suppose the central bank wants to achieve the reduction in inflation in 1 year, then 1 year of unemployment at 10% above the natural rate is required Suppose the central ba

36、nk wants to achieve the reduction in inflation over 2 years, then 2 years of unemployment at 5% above the natural rate is required., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,30 of 31,A First Pass,For example, lets assume that =1 By the same reasoning, reducing inf

37、lation over 5 years requires 5 years of unemployment at 2% above the natural rate (five times 2% = 10%); reducing inflation over 10 years requires 10 year of unemployment at 1% above the natural rate., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,31 of 31,A First Pass

38、,The sacrifice ratio is the number of point-years of excess unemployment needed to achieve a decrease in inflation of 1%.,For example, if is roughly equal to one, as the estimated Phillips curve suggests, then the sacrifice ratio of roughly equal to one., 2006 Prentice Hall Business Publishing Macro

39、economics, 4/e Olivier Blanchard,32 of 31,Expectations and Credibility:The Lucas Critique,The Lucas critique states that it is unrealistic to assume that wage setters would not consider changes in policy when forming their expectations. If wage setters could be convinced that inflation was indeed go

40、ing to be lower than in the past, they would decrease their expectations of inflation, which would in turn reduce actual inflation, without the need for a change in the unemployment rate., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,33 of 31,Expectations and Credibil

41、ity:The Lucas Critique,Thomas Sargent, who worked with Robert Lucas, argued that any in order to achieve disinflation, any increase in unemployment would have to be only small. The essential ingredient of successful disinflation, he argued, was credibility of monetary policythe belief by wage setter

42、s that the central bank was truly committed to reducing inflation. The central bank should aim for fast disinflation., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,34 of 31,Nominal Rigidities and Contracts,A contrary view was taken by Stanley Fischer and John Taylor.

43、They emphasized the presence of nominal rigidities, or the fact that many wages and prices are not readjusted when there is a change in policy. If wages are set before the change in policy, inflation would already be built into existing wage agreements., 2006 Prentice Hall Business Publishing Macroe

44、conomics, 4/e Olivier Blanchard,35 of 31,Nominal Rigidities and Contracts,While Fischer argued that even with credibility, too rapid a decrease in nominal money growth would lead to higher unemployment, Taylors argument went one step further. He argued that wage contracts are not all signed at the s

45、ame time, but that they are staggered over time. He showed that this staggering of wage decisions imposed strong limits on how fast disinflation could proceed without triggering higher unemployment., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,36 of 31,Nominal Rigidi

46、ties and Contracts,Figure 9 - 3,Disinflation Without Unemployment in the Taylor Model,If wage decisions are staggered, disinflation must be phased in slowly to avoid an increase in unemployment., 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard,37 of 31,The U.S. Disinflation, 1970-1985,Figure 1,