lectures in macroeconomics- charles w. upton why the phillips curve
TRANSCRIPT
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Lectures in Macroeconomics- Charles W. Upton
Why the Phillips Curve
)( e
SRLS
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Why the Phillips Curve
Conclusion
• No Long Run Phillips Curve
• Apparently a Short Run Phillips Curve, when inflation rate differs from expected rate.
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Why the Phillips Curve
Our Task
• How do we Explain these findings?
• And how do we incorporate them into the model?
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Why the Phillips Curve
Long Run and Short Run LS
D
SSRSLR
H*
w*
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Why the Phillips Curve
Long Run and Short Run LS
D
SSRSLR
H*
w*
You are currently making $10 an hour, and are suddenly offered $15 an hour.
If it is a temporary wage increase, move along the short run LS curve.
If it is simply due to inflation, ignore it.
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Why the Phillips Curve
Long Run and Short Run LS
D
SSRSLR
H*
w*
So which is it?
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Why the Phillips Curve
Imperfect Information
10
wwR
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Why the Phillips Curve
Imperfect Information
wwR History will be the guide to the
value of ω.
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Why the Phillips Curve
Imperfect Information
wwR History will be the guide to the
value of ω.
If you expect a lot of variability in
inflation rates and little variability in real wage rates, set ω very low
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Why the Phillips Curve
Imperfect Information
wwR History will be the guide to the
value of ω.
If you expect a lot of variability in
inflation rates and little variability in real wage rates, set ω very low
If you expect little variability in
inflation rates but a lot of variability in
real wage rates, set ω high
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Why the Phillips Curve
The Response
D
SSRSLR
H*
w*
H**
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Why the Phillips Curve
The Equation
D
SSRSLR
H*
w*
H**
)( e
SRLS
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Why the Phillips Curve
The Waste
D
SSRSLR
H*
w*
H**
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Why the Phillips Curve
The Waste II
D
SSRSLR
H*
w*
H**
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Why the Phillips Curve
Can You be Consistently Fooled?
D
SSRSLR
H*
w*
H**
Lincoln’s law says you can be fooled some of the
time.
Ex post – yes
Ex ante - no
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Why the Phillips Curve
Implications
D
SSRSLR
H*
w*
H**
More inflation than expected means an increase in output
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Why the Phillips Curve
Implications
D
SSRSLR
H*
w*
H**
More inflation than expected means an increase in outputLess inflation than
expected means a decline in output
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Why the Phillips Curve
Can We Exploit This?
Y(U=Un)
Any boost will be temporary.
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Why the Phillips Curve
Can We Exploit This?
Y(U=Un)
So why not constantly create surprise inflation
and get boost after boost.
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Why the Phillips Curve
Can We Exploit This?
Y(U=Un)
So why not constantly create surprise inflation
and get boost after boost.
Dream on.
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Why the Phillips Curve
Can We Mismanage This
• In Pleasantville, the inflation rate is always as expected. Information is always perfect
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Why the Phillips Curve
Can We Mismanage This
• In Pleasantville, the inflation rate is always as expected. Information is always perfect– No waste
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Why the Phillips Curve
Can We Mismanage This
• In Pleasantville, the inflation rate is always as expected. Information is always perfect
• In Mudville, monetary policies are quixotic, and the inflation rate is highly uncertain.
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Why the Phillips Curve
Can We Mismanage This
• In Pleasantville, the inflation rate is always as expected. Information is always perfect
• In Mudville, monetary policies are quixotic, and the inflation rate is highly uncertain.– A lot of business cycles due to a lot of
imperfect information.
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Why the Phillips Curve
Can We Mismanage This
• In Pleasantville, the inflation rate is always as expected. Information is always perfect
• In Mudville, monetary policies are quixotic, and the inflation rate is highly uncertain.
Moral: Mudville should do a better job of
monetary policy so as to reduce inflationary
surprises.
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Why the Phillips Curve
An Important Caveat
• We tell the story in terms of workers getting surprised.
• We could just as well tell it from the perspective of firms getting surprised.
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Why the Phillips Curve
An Important Caveat
• We tell the story in terms of workers getting surprised.
• We could just as well tell it from the perspective of firms getting surprised.
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Why the Phillips Curve
Surprising Firms
D
SSRSLR
H*
w*
You are selling your product for $10 but the price jumps to $15.
If it is a price jump, take advantage of it.
If it is simply due to inflation, ignore it.
So which is it?
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Why the Phillips Curve
Implications
D
SSRSLR
H*
w*
H**
More inflation than expected means an increase in output
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Why the Phillips Curve
Implications
D
SSRSLR
H*
w*
H**
More inflation than expected means an increase in outputLess inflation than
expected means a decline in output
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Why the Phillips Curve
End
©2004 Charles W. Upton. All rights reserved