2 What is macroeconomics? Seeks to understand changes inThe rate of economic growthThe rate of inflationUnemploymentTrade with other countries
3 Measuring Economic Growth Gross Domestic Product (GDP)The monetary value of all goods and services produced within a country in a given time periodReal GDPThe volume of goods and services produced within a country (i.e. GDP adjusted for price fluctuations)Economic Growth:Percentage rate of increase of real GDP
4 Measuring InflationAnnual percentage rate of change in the consumer price indexIn the Eurozone: Harmonized Index of Consumer Prices (HICP)
5 Measuring Unemployment People out of work and looking for workLabor force = employed + unemployed
7 Government PoliciesAffect aggregate supply and demand, economic output and price levelShort-term effectsLong-term effects
8 Aggregate Demand/ Aggregate Supply Includes consumption, investment, government spending, exportsAffects output, prices, employmentAggregate Supply includesIncludes total supply of goods and services produced by a national economy during a particular time periodReflects productive capacity
9 Approaches to government intervention Keynesian economicsDemand-focusedCalls for active government (both on monetary and fiscal policy)Neo-classical economicsSupply-focusedFocuses mostly on interest rates and money supplyMonetarism (Milton Friedman)Inflation is a monetary phenomenon (not linked to production)Rejects fiscal policy bc/ of “crowding out” of the private sectorObjective is to keep rate of growth and money supply constant
11 Monetary PolicyManipulates money supply and demand through interest ratesIndependent Central BanksHistorically recent (Fed since 1913)Political independenceSarkozy’s motivations?
12 Eurosystem (ESCB) Comprises European Central Bank National Central Banks (will continue until all EU members have adopted Euro)
13 Tasks of the ECB Sets interest rates Manages foreign exchange operationsHolds and manages some official reserves of euro area countriesPromotes smooth operation of payment systemsNCBsLend to national financial institutionsEnsure settlement of cashless domestic and trans-border paymentsCollect national statistics
14 Decision-making in ECB Governing CouncilIncludes Executive Board and heads of NCBsExecutive BoardPresident, Vice-President, and four more members (appointed jointly by heads of states)General CouncilIncludes all heads of NCBs of ALL EU member statesNo decision-making power; but oversees progress of member states towards adopting Euro
15 Eurosystem Strategy Primary objective: price stability Definition of price stability: “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”
17 Other Public PoliciesAffect aggregate supply and demand, economy’s output and price level throughBudget deficitsFiscal Policy“crowding out”Investing in productivity (technology policy)Improving human capital (education)Improving physical capital (infrastructure)External relations (e.g. war expenditures in Iraq)In the EU, these public policies mostly not integrated
18 Fiscal Policy Goals Stability and Growth Pact National government deficit no larger than 3% of GDPReduces inflationary pressures (and free-riding)Main purpose of fiscal policy should be stabilizationBut fiscal policy is main tool left to governments where monetary policy is constrainedEvidence that most fiscal policy is pro-cyclicalautomatic stabilizer
20 The Eurosystem’s future Deepening of integration?Call for more regulatory power of ECB (now banking regulation national)Call for a political voice for the EurogroupAttractiveness of the Euro – has served as buffer in crisisDenmarkIcelandHungary
21 EU vs. Euro AreaEuro area: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Spain.EU Member States obliged to adopt the euro eventually: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia (Jan. 1, 2009), Sweden.EU Member States with an opt out from adopting the euro: Denmark, United Kingdom.