Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Capitolo 13 Domanda Aggregata e...

Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA

©EGEA 2006

Capitolo 13

Domanda Aggregatae Offerta Aggregata


©EGEA 2006

Aggregate demand and aggregate supply

Fig. 13.01


©EGEA 2006

Aggregate demand and aggregate supply

Output

Infla

tion

AS

AD

Fig. 13.01


©EGEA 2006

IS-LM-BP and AD under fixed exchange rates

Fig. 13.02


©EGEA 2006

Fixed nominal exchange rates

Rat

e of

infla

tion

Output

Inte

rest

rat

e

Output

LM

Financialintegration

line

IS0

A0

A0

LAD line0

Y0

Y0

Interest rates determined by rate of return on assets in the rest of the world.

...the real money supply determines position of the LM curve, =0.

Given the fixed exchange rate and now the inflation rate...

We start from a position with the goods market clearing as well.

Fig. 13.02


©EGEA 2006

Suppose the inflation rate rises above 0...

Rat

e of

infla

tion

Output

Inte

rest

rat

e

Output

LM


line

LAD line

IS0

A0

A1

A0A1

Y0

Y0

0

IS1

Y1

Y1

1

Because prices at home have risen faster than abroad, the demand for our exports will decrease, shifting the IS curve to the left.

Fig. 13.02


©EGEA 2006

Now suppose the inflation rate falls below 0...

Rat

e of

infla

tion

Output

Inte

rest

rat

e

Output

LM


line

LAD line

IS0

A0

A1

A2

A0A1 A2

Y0Y1

Y0Y1

0

1

IS2

IS1

Y2

Y2

2

Because prices at home have risen slower than abroad, the demand for our exports will increase, shifting the IS curve to the left.

Fig. 13.02


©EGEA 2006

AD under fixed exchange rates

Rat

e of

infla

tion

Output

Inte

rest

rat

e

Output

LM

AD


line

LAD line

IS0

A0

A1

A2

A0A1 A2

Y0Y1 Y2

Y0Y1 Y2

0

1

2

IS2

IS1

Fig. 13.02


©EGEA 2006

Shifts in the aggregate demand curve

Fig. 13.03


©EGEA 2006

2AD

Exogenous shift in IS shifts AD in same direction

Rat

e of

infla

tion

Output

Inte

rest

rat

e

Output

LM

0AD


line

LAD line

IS0

A0 A´2

A0

Y0

Y0

0

IS2

A´2

Y2

Y2

SupposeG increases, IS shifts to the right.

Fig. 13.03


©EGEA 2006

Aggregate demand and supplyunder fixed exchange rates

Fig. 13.04


©EGEA 2006

Aggregate demand and supplyunder fixed exchange rates: long-run

Infla

tion

A

0

LAS

Output gap Y -Y( )

LAD *

Note that we will be working with the output gap.

Real exchange

rate is unchanging

Any inflation rate is sustainable

along the output trend.

Fig. 13.04


©EGEA 2006

Aggregate demand and supplyunder fixed exchange rates: short-run

Infla

tion

AS

AD

A

0

LAS

LAD *

‘Longer’ the short-run, the steeper the AS.

‘Longer’ the short-run, the flatter the AD.

Fig. 13.04

Output gap Y -Y( )


©EGEA 2006

Fiscal policy under fixed exchange rates

Fig. 13.05


©EGEA 2006

Fiscal expansion under fixed exchange ratesIn

flatio

n

0

AS

AD

A

LAS

*

AD

B

Fig. 13.05

Output gap Y -Y( )

LAD


©EGEA 2006

Fiscal expansion under fixed exchange ratesIn

flatio

n

0

AS

AD

A

LAS

*

AD

B´B

Horizontal distance between B and B' is a measure of the deterioration of the primary current account

Fig. 13.05

Output gap Y -Y( )

LAD


©EGEA 2006

Transition: fiscal expansion must be followed by a contraction later on to pay for debt

Infla

tion

0

AS

AD

A

LAS

*

AD

B

Fig. 13.05

Output gap Y -Y( )

LAD


©EGEA 2006

Transition: core inflation rate “catches up” to the higher inflation at B.

Infla

tion

0

AS

AD

A

LAS

*

AD

B

AS

C

Transition path of output gap passes through negative territory.

Fig. 13.05

Output gap Y -Y( )

LAD


©EGEA 2006

Long-run response of temporary fiscal expansionIn

flatio

n

0

AS

AD

LAS

*

ADA

Fig. 13.05

Output gap Y -Y( )

B

LAD


©EGEA 2006

Fiscal expansion is cancelledIn

flatio

n

0

AS

AD

LAD

LAS

*

AD

AS

A

Fig. 13.05

Output gap Y -Y( )

BC

Broad spiral from A to B to C, back to A.


©EGEA 2006

A devaluation

Fig. 13.06


©EGEA 2006

Starting at point A, there is a nominal devaluation which depreciates the real exchange rate…

Rat

e of

infla

tion

Output gap

Inte

rest

rat

e

Output gap

LM

BP

LAD

IS

A

A

0

0LAS

AS

AD

*i

Fig. 13.06


©EGEA 2006

B

B

…the improved current account shifts the IS curve to IS´

Rat

e of

infla

tion

Output gap

Inte

rest

rat

e

Output gap

LM

LAD

IS

A

A

0

LM´

0LAS

AS

ADAD´

*i

Fig. 13.06

BP

IS´


©EGEA 2006

B

B

…Inflation is now above the world level and competitiveness is reduced, shifting IS back

Rat

e of

infla

tion

Output gap

Inte

rest

rat

e

Output gap

LM

LAD

IS

A

A

0

LM´

0LAS

AS

ADAD´

*i

Fig. 13.06

BP

IS´


©EGEA 2006

Expansionary monetary policy under a fixed exchange rate regime

Fig. 13.07


©EGEA 2006

Periodic realignments of the exchange rate

Time

Rea

l exc

hang

e ra

te

*

0 SDevaluation ( )

}}

Fig. 13.07


©EGEA 2006

Fig. 13.08

85

90

95

100

105

110

115

1975M1 1978M1 1981M1 1984M1 1987M1 1990M1 1993M1 1996M1

Real exchange rate: Franc/DM 1975-98


©EGEA 2006

IS-LM-BP and AD under flexible exchange rates

Fig. 13.09


©EGEA 2006

IS

Flexible exchange rates, rate of growth of money supply () equals rate of inflation ()

Rat

e of

infla

tion

Output gap

Inte

rest

rat

e

Output gap

A

A

LM

BP

M/P constant since numerator and denominator assumed to grow at same rate.

Recall: position of IS curve is now endogenous, shifting with the real exchange rate so it passes through A in upper figure.

Fig. 13.09


©EGEA 2006

AD

A´

Now suppose domestic inflation increases to ´.

Rat

e of

infla

tion

Output gap

Inte

rest

rat

e

Output gap

LM´

A

A´ A

LM

BP

M/P falling since numerator now grows slower than the denominator.

Exchange rate appreciated in move to A´ which is why output fell.

Fig. 13.09

ISIS´


©EGEA 2006

Aggregate demand and supplyunder flexible exchange rates

Fig. 13.10


©EGEA 2006

Aggregate demand and supplyunder flexible exchange rates

Infla

tion

0

AS

AD

Moneygrowth

line

LASMonetary authority chooses the rate of growth of money supply (thereby determining long-run inflation). Nominal exchange rate changes so that PPP holds.

Fig. 13.10

Output gap Y -Y( )


©EGEA 2006

Monetary policy under flexible exchange rates

Fig. 13.11


©EGEA 2006

We start at the equilibrium point A...In

flatio

n

0

AS

AD

LAS

A

Fig. 13.11

Output gap Y -Y( )


©EGEA 2006

... Now an expansionary monetary policy under flexible exchange rates

Infla

tion

0

AS

AD

LAS

AAD

B

Increase in the growth of the money supply has an expansionary impact at first (A to B).

Fig. 13.11

Output gap Y -Y( )


©EGEA 2006

Core inflation increasesas long as the output gap is positive.

Infla

tion

0

AS

AD

LAS

AAD

BC

ASBecause of the positive slope of AS, inflation rates along AS are greater than core inflation for a positive output gap.

Fig. 13.11

Output gap Y -Y( )


©EGEA 2006

Fig. 13.12

GDP in Hungary and Poland, 1989-2004

70

80

90

100

110

120

130

1989 1991 1993 1995 1997 1999 2001 2003

Hungary Poland


©EGEA 2006

...and we suffer an adverse supply shockIn

flatio

n

0

AS

AD

LAS

A

B

ASStagflation is the result with both unemployment and inflation increasing.

Fig. 13.14

Output gap Y -Y( )


©EGEA 2006

Suppose we try to fight induced unemployment with expansionary demand policies...

Infla

tion

0

AS

AD

LAS

AAD

BC

AS We successfully fight unemployment, but at a cost of increased inflation in the long-run equilibrium at C.

Fig. 13.14

Output gap Y -Y( )


©EGEA 2006

...or we try to fight the inflationary impact of the adverse supply shock. In

flatio

n

0

AS

AD

LAS

A

AD

B

AS

D

We successfully fight inflation, but at a cost of increased unemployment until we return to the long-run equilibrium at A.

Fig. 13.14

Output gap Y -Y( )


©EGEA 2006

AD

In principle we could “fight fire with fire”,i.e., AD policy change to offset demand shock

Infla

tion

0

AS

AD

LAS

A

B

Once the policy orthodoxy (in the 1960s), this demand policy response has been remarkably subdued in European countries.

Fig. 13.15

Output gap Y -Y( )


©EGEA 2006

Fig. 13.16

0

1

2

3

4

5

6

7

2000M1 2001M1 2002M1 2003M1 2004M1

Euro Area United States

Short-term interest rates in Euroland and USA


©EGEA 2006

Policymakers want to reduce inflationfrom point A to point CIn

flatio

n

0

AS

AD

LAS

A

C

Fig. 13.17

Output gap Y -Y( )


©EGEA 2006

Contractionary demand-side policies results in unemployment pain at first

Infla

tion

0

AS

AD

LAS

A

AD

B

Fig. 13.17

Output gap Y -Y( )


©EGEA 2006

Long-run equilibrium achieved when short-run aggregate supply shifts down sufficiently

Infla

tion

0

AS

AD

LAS

A

AD

B

C

AS

Speed of the AS shift depends on speed with which core inflation adjusts downward in the face of unemployment.

Fig. 13.17

Output gap Y -Y( )

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Capitolo 13 Domanda Aggregata e...

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