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Lecture 211 Macroeconomic Analysis 2003 Theories of Inflation Blanchard (23) Mankiw (13)

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1 Lecture 211 Macroeconomic Analysis 2003 Theories of Inflation Blanchard (23) Mankiw (13)

2 Lecture 212 Learning Objectives Inflation in the classical model Deficit financing and inflation Cagans model of hyper inflation Policies to control hyper inflation Demand pull and cost push inflations Views on the role of economic policy

3 Lecture 213 Inflation in the Classical Theory

4 Lecture 214 Seigniorage (inflation tax) Model of Inflation

5 Lecture 215 Cagans Model of Inflation and Money Supply

6 Lecture 216 Seigniorage and Hyperinflation

7 Lecture 217 Determination of the Natural Rate of Unemployment: Wage and Price Setting and Inflation Example from Blanchard (2002; pp.179)

8 Lecture 218 Policies used to control Hyperinflation

9 Lecture 219 Y = Yn :Classical supply Neoclassical supply Y = AD Keynesian Supply 0 Y = yn Y1 P P1 Reply to a demand shock Adaptive Expectation: a to b to c Rational expectation: a to c Keynesian response a to d a b c d LAS AS AD0 AD1 Price and Output Response to Aggregate Demand Shock

10 Lecture 2110 Price Level Output Gap AS AD0 AD1 AD2 AD3 a b c AD4 Y0Y1 Y3Yc Aggregate Demand, Productive Capacity and the Price Level Higher Wage Rate Translates into Higher Prices P1 P3 P5 P4 Keynesian New Classical New Keynesian part

11 Lecture 2111 AS=f(w,p e ) o LAS Inflation, Output and Unemployment in the Short Run AD =f(M,G, T)

12 Lecture 2112 Wage Price Spiral Aggregate Supply and Inflation

13 Lecture 2113 U.K Retail price index (in long scale) Prices increased around sevenfold over 650 years (with 200 years of stability) from Mitchell (1988) as in Miles and Scott Figure 12.1

14 Lecture 2114 Similar story in the United States

15 Lecture 2115 World inflation, % increase in consumer prices Inflation reveals a common international pattern

16 Lecture 2116 P Y Yn AD0 AD1 LAS SAS a b c 0 Reply to a demand shock Adaptive Expectation: a to b to c Rational expectation: a to c Adaptive and Rational Expectation Views on the Demand Pull Inflation P0 P2 P1

17 Lecture 2117 a b c d e AD0 AD1AD3 f Yn Price Level AS0 AS1 AS2 SA3 YLYH P0 P1 P2 P3 Demand pull and Cost Push Inflation: Movement of Aggregate Demand and Supply Around the Natural Rate 0

18 Lecture 2118 Should Policy be Active or Passive? Classical Economists on Economic Policy

19 Lecture 2119 Lags in Economic Policy

20 Lecture 2120 Classical, Keynesian and Monetarist Approaches to Economic Policy


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