MONETARY ECONOMICS. Monetary Macroeconomic Modeling Setting the stage. CONTENT. Key indicators of Macroeconomic Performance - Definition - Measurement - Stylized Facts Macroeconomic Policy Objectives - Stabilization - Long-run Growth Monetary Macroeconomic Framework.
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Monetary Macroeconomic Modeling
Setting the stage
- Stylized Facts
- Long-run Growth
These are three key economic variables that policy makers try to influence….
Business Cycle captures cyclical variations of actual output around potential output.
These cyclical variations are costly. Expansion is normally related to inflation while contraction is related to unemployment.
The worst scenario is when contraction is accompanied by inflation, termed as STAGFLATION.
Stabilization policies aim at dampening the magnitudes of cyclical variations
Growth policies aim at increasing the trend in output over long periods of time.
The rates of changes in these prices are measures of inflation
- Frictional: in-between jobs
- Structural: changes in economic structure
- Cyclical: due to cyclical downturns
- How to dampen the cycles?
- How to accelerate long-term growth?
- A need to understand theories of fluctuations and
Y = C(Y-T) + I(r) + G
CY-T > 0; Ir < 0; Both G and T assumed
exogenous and NX = 0
M/P = L(Y, r); Ly > 0; Lr< 0
Y = f(P); fp > 0
These are basic functions with no elements of uncertainty and expectations
Output (Y) = Aggregate Expenditure (E)
- Household Expenditure (C)
- Firm Expenditure (I)
- Government Expenditure (G)
- International Sector (X – M)
The IS function is negatively sloped…
Justification: A fall in interest rate motivates investment and, thus, planned expenditure. To restore equilibrium, output (Y) must increase.
Slope: depends on marginal propensity to consume and Interest sensitivity of Investment.
Intercept: containing the factors that shift the curve.
LM Curve is positively sloped.
An increase in income raises money demand. With money supply fixed, interest rate must increase to restore equilibrium in the money market.
The SLOPE of the LM curve depends on the income and interest rate sensitivities of money demand.
Intercept: Changes in money appears in the intercept. It leads to shift in LM function.
Y = f(P)
dY = fPdP
fP= 0 (Classical)
fP> 0 (Keynesian)
The foundation of AS function is the assumption of wage stickiness or imperfect information in the labor market.