Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Capitolo 10 Domanda Aggregata, Prodotto, e Tasso di Interesse

Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA

©EGEA 2006

Capitolo 10

Domanda Aggregata, Prodotto, e Tasso di Interesse


©EGEA 2006

Cyclical fluctuations

Figure 10.01


©EGEA 2006

Time

Rea

l GD

P

0

Long-term growth trend

Changes we see

Actual real GDP

, and how we decompose them.

(-) cyclical deviation

(+) cyclical deviation

Figure 10.01


©EGEA 2006

Table 10.01

Openness and size (%)Share of world

GDPOpenness

Poland 0.6 29.7Belgium 0.8 80.3Sweden 0.7 40.2

Switzerland 0.8 40.9Netherlands 1.3 59.1Korea, Rep. 1.5 39.3

Brazil 1.4 14.7Canada 2.2 14.7China 3.9 27.4

United Kingdom 4.8 26.7Germany 6.1 33.5Japan 12.4 10.5

European Monetary Union 20.6 11.1United States 32.1 11.8

Source: World Development Indicators , The World Bank, 2004


©EGEA 2006

General macroeconomic equilibriumin the open economy

Figure 10.02


©EGEA 2006

Interaction of markets in the closed economy

GoodsMarket

MoneyMarket

Interest rates affect aggregate demand

Income influences demand for money

Figure 10.02


©EGEA 2006

Now we open the economy…

GoodsMarket

MoneyMarket

ForeignExchange

Market

Real exchange rates affect aggregate demand

Interest ratesinfluence

the exchange rate

Interest rates affect aggregate demand

Income influences demand for money

Figure 10.02


©EGEA 2006

♦ Identità contabile fondamentale (equazione delle risorse-impieghi)

Y = C + I + G + XZ

C = C(, Y-T), con e T dati o esogeni (* e T*)

I = I(i, q), q esogeno (animal spirits), q*

G esogena G*

SPPC =X-Z=SPPC(Y, Y*, ), Y* reddito estero


©EGEA 2006

♦ Parità dei tassi di interesse: i* = i♦ ius=ie

♦ (1+ius)=(1/St)(1+ie)St+1=(1+ie) St+1/St

♦ St+1=(1+s) St

♦ (1+ius)=(1+ie)(1+s) se prendo i log (approssim.)♦ ius=ie+s dove s è la variazione del tasso di cambio

nominale♦ se ius>ie per garantire lo stesso rendimento delle

attività nei due paesi s>0 (apprezzamento dell’euro), ma ciò implica anche che all’inizio (quando si verifica ius>ie) l’euro si deve svalutare


©EGEA 2006

The 45° diagram

Figure 10.03


©EGEA 2006

Output

Des

ired

dem

and

DD

0

*, , , ,C T I i q G CA YP YDD Y

varies

Figure 10.03

varies

Ceteris paribus


©EGEA 2006

Equilibrium conditionD

esire

d de

man

d

0

45°

equilibrium inthe goods market i.e. =0 Y

DD Y

excess supply of goods

DD Y

0Y

Figure 10.03

Output

DD

Y´Y


©EGEA 2006

The 45° Diagram, a.k.a. “The Keynesian Cross”D

esire

d de

man

d

0

45°

DD

Y

Y

*

, ,

, ,

Y C Y T I i q

G PCA Y Y

A

Figure 10.03

Output


©EGEA 2006

The multiplier

Figure 10.04


©EGEA 2006

Start from an equilibrium in the goods marketD

esire

d de

man

d

Y

DD

45°

DD(Y)

A

Figure 10.04

Output0


©EGEA 2006 Output

Des

ired

dem

and

Y

45°

DD´(Y)

ADD

DD(Y)

*

´

´ , , , ,

G

DD C Y T I i q G G PCA Y Y

Government expenditures increase

Figure 10.04

Output0

G


©EGEA 2006

B

Output increases to match increase in demand

Output

Des

ired

dem

and

A

Y

Y

45°

A´ DD(Y)

DD´(Y)

Figure 10.04

Output0

G


©EGEA 2006

BA´ increase in income means DD´ increases too

Output

Des

ired

dem

and

A

Y

Y

45°

BB´

DD(Y)

DD´(Y)

Figure 10.04

Output0

G

A´


©EGEA 2006

A´´

Output increases againto meet induced demand, A´B´

Output

Des

ired

dem

and

Y

Y

45°

BA´

B´

DD(Y)

DD´(Y)

A

Figure 10.04

Output0

G


©EGEA 2006

A´´

The government spending multiplier

Output

Des

ired

dem

and

A

Y

Y

45°

BA´

E

Y*

Y

B´

DD(Y)

DD´(Y)

Y G

Figure 10.04

Output0

G


©EGEA 2006

Years after change

1 2 3

Euro Area 1.43 1.31 0.41

UK 0.75 0.33 0.01

USA 1.05 0.49 -0.38

Canada 1.24 0.52 -0.17

Japan 1.85 1.58 -0.09

Demand Multipliers: Five Examples

The numbers represent the effect of a change in government expenditure of 1% of real GDP in 2000 and 2001 in all five regions on each economy's output (as percentage deviation from baseline).

Table 10.02


©EGEA 2006

Deriving the IS curve

Figure 10.05


©EGEA 2006

De

sire

d d

em

an

d

Output

Inte

rest

rat

e

Output

DD i( )

DD

Y Y

Y=DD

i

A

Identifying an equilibrium combination of i and Y

Figure 10.05

A


©EGEA 2006

De

sire

d d

em

an

d

Output

Inte

rest

rat

e

Output

DD i( )

DD i( )

DD

Y

DD

Y Y Y

Y=DD

i

iB

A

i i

Equilibrium output will change if the interest rate changes

A

Figure 10.05

B


©EGEA 2006

iDe

sire

d d

em

an

d

Output

Inte

rest

rat

e

Output

DD i( )

DD i( )

DD

Y

DD

Y Y Y

A

ISY=DD

iB

A

i i

IS curve derived by finding Y’s for all i’s

Figure 10.05

B


©EGEA 2006

De

sire

d d

em

an

d

Output

Inte

rest

rat

e

Output

DD i( )

DD i( )

DD

Y

DD

Y Y Y

A

ISY=DD

i

iB

A

i i

To the right of the IS curve supply of goods exceeds their demand

Excess supply of

goods

DD i( )

i

Figure 10.05

B

D

C

D

C


©EGEA 2006

Inte

rest

rat

e

Output

B

A

IS

Excess supply of

goods

Excess demand

for goods

To the left of the IS curve demand for goods exceeds their supply

Convince yourself

that this is true!

Hint: interest rates are lower than

along the IS curve where Y=DD(i)

Figure 10.05


©EGEA 2006

Exogenous increase in aggregate demand

Figure 10.06


©EGEA 2006

De

sire

d d

em

an

d

Output

Inte

rest

rat

e

Output

( )DD G,i

ADD

Y

Y=DD

Start from equilibrium in the goods market...

IS

Y

iA

Figure 10.06


©EGEA 2006

De

sire

d d

em

an

d

Output

Inte

rest

rat

e

Output

( )DD G ,iB

A

DD

Y Y Y

Y=DD

i

Exogenous increase in aggregate demand(e.g. G increases, but hold i constant at first)

A

IS

B( )DD G,i

DD

Y

Figure 10.06


©EGEA 2006

De

sire

d d

em

an

d

Output

Inte

rest

rat

e

Output

( )DD G ,iB

A

DD

Y Y Y

IS´

Y=DD

i

Similar shift to that from A to B would occur for all other values of the interest rate

A

IS

B( )DD G,i

DD

Y

Figure 10.06


©EGEA 2006

Figure 10.07

GDP growth and Tobin’s q in the USA

30

40

50

60

70

80

90

100

110

Jan/95 Jan/96 Jan/97 Jan/98 Jan/99 Jan/00 Jan/01 Jan/02 Jan/03

-2

-1

0

1

2

3

4

5

6

Tobin's q (left scale: 2000=100) GDP growth (right scale)


©EGEA 2006

Deriving the LM curve

Figure 10.08


©EGEA 2006

Real money stock

OutputY

i

Holding the real money supply constant, we determine i for some given level of output...

i

Y,i c( , )L

M P

Realmoneysupply

AA

Figure 10.08

No

min

al n

tere

st r

ate

No

min

al n

tere

st r

ate


©EGEA 2006

Real money stock

OutputY Y

i

Same question for a higher level of output...

i

i

Y,i c( , )L

Y ,i c( , )L

i

M P

Realmoneysupply

A

B

A

Figure 10.08

B

No

min

al n

tere

st r

ate

No

min

al n

tere

st r

ate


©EGEA 2006

Real money stock

OutputY Y

LM

i

LM curve derived by finding i’s for all Y’s

i

i

Y,i c( , )L

Y ,i c( , )L

i

M P

Realmoneysupply

A

BB

A

Figure 10.08

No

min

al n

tere

st r

ate

No

min

al n

tere

st r

ate


©EGEA 2006

Real money stock

OutputY Y

LM

i

To the right of the LM curve demand for real balances exceeds their supply

i

i

Y,i c( , )L

Y ,i c( , )L

i

M P

Realmoneysupply

A

BExcess demand

for money

CC

Figure 10.08

B

A

No

min

al n

tere

st r

ate

No

min

al n

tere

st r

ate


©EGEA 2006

Real money stock

OutputY Y

A

LM

i

To the left of the LM curve supply of real balances exceeds their demand

i

i

Y,i c( , )L

Y ,i c( , )L

i

M P

Realmoneysupply

A

B

Excess supply of money

CC

Figure 10.08

B

No

min

al n

tere

st r

ate

No

min

al n

tere

st r

ate


©EGEA 2006

Output

LM

Excess demand

for money

Excess supply of money

Money market equilibrium on the LM curve

Figure 10.08

No

min

al n

tere

st r

ate


©EGEA 2006

Increasing money supply shifts LM outward

Figure 10.09


©EGEA 2006

Real money stock

Output

A

M P Y Y

BA

LM´

i

Increasing money supply shifts LM outward(at the same interest rate, we need Y to go up for greater D)

i

D= Y,i cL ( , )

Realmoneysupply LM

B

Figure 10.09

D= Y´,i cL ( , )

No

min

al n

tere

st r

ate

No

min

al n

tere

st r

ate


©EGEA 2006

Real money stock

Output

A

M P Y

A

LM´

i

Increasing money supply shifts LM outward(at the same Y, we need i to go down)

i

D= Y,i cL ( , )

Realmoneysupply LM

CC

Figure 10.09

No

min

al n

tere

st r

ate

No

min

al n

tere

st r

ate


©EGEA 2006

i*Financial integration line

Inte

rest

rat

eThe balance of payments line

Figure 10.10

Output


©EGEA 2006

General equilibrium

Figure 10.11


©EGEA 2006

Inte

rest

rat

e

IS

Equilibrium in the goods market

Changes in output will occur when we are not on the IS curve (as response to shortage to the left of IS and surplus to the right).

Figure 10.11

Output


©EGEA 2006

Inte

rest

rat

e

LM

Equilibrium in the money market

Changes in the interest rate will occur when we are not on the LM curve. Below LM there is an excess demand for money (bonds chase money). Above the LM there is an excess supply of money (money chases bonds).

Figure 10.11

Output


©EGEA 2006


Output

Inte

rest

rat

eEquilibrium in international capital markets

When domestic and foreign rates of return are not the same, capital will flow towards the higher returns until returns are equalized.

Figure 10.11


©EGEA 2006


Inte

rest

rat

eGeneral equilibrium

LM

IS

A

Figure 10.11

Output


©EGEA 2006

Money policy under fixed exchange rates

Figure 10.12


©EGEA 2006


Inte

rest

rat

e

LM

IS

A

Starting from general equilibrium, there is an unanticipated increase in the supply of money

Figure 10.12

Output


©EGEA 2006


Inte

rest

rat

e

LM

IS

A

Starting from general equilibrium, there is an unanticipated increase in the supply of money

LM´

Figure 10.12

Output


©EGEA 2006


Inte

rest

rat

e

IS

A

Note: points A,B,C each satisfy only twoof three equilibrium conditions

LM´

C

BThis condition is not moving!

Figure 10.12

Output


©EGEA 2006


Inte

rest

rat

e

IS

A

Implication of fixed exchange rates in this case: No reason for the IS curve to move.

LM´

C

BThis condition is not moving either!

Figure 10.12

Output


©EGEA 2006


Inte

rest

rat

e

IS

A

The central bank has to bring LM back to the original position to keep the exchange rate fixed.

LM´

Figure 10.12

Output


©EGEA 2006


Inte

rest

rat

e

LM

IS

A

The central bank has to bring LM back to the original position to keep the exchange rate fixed.

LM´

Monetary policy is ineffective for changing output.

Figure 10.12

Output


©EGEA 2006

Exogenous changeFixed exchange rates

Flexible exchange rates

Expansionary demand disturbance Increase No effect

Expansionary monetary disturbance No effect Increase

Increase in foreign interest rates Decrease Increase

Effect on real GDP

The Mundell-Fleming model: Summary

Table 10.04


©EGEA 2006

Table 10.3

Sterilized and unsterilizedforeign exchange market interventions

M0 F DC M0 F DC

Step 1 – – = – – =Step 2 + +Overall – – = = – +

Unsterilized interventions Sterilized interventions


©EGEA 2006

Demand disturbance, fixed exchange rates

Figure 10.13


©EGEA 2006


Inte

rest

rat

eStarting from general equilibrium, there is an

unanticipated increase in the demand for goods

LM

IS

A

Figure 10.13

Output


©EGEA 2006


Inte

rest

rat

eStarting from general equilibrium, there is an

unanticipated increase in the demand for goods

LM

IS

A

IS´

Figure 10.13

Output


©EGEA 2006


Inte

rest

rat

eNote: points A,B,C each satisfy only two

of three equilibrium conditions

This condition is not moving!

LM

AB

IS´

C

Figure 10.13

Output


©EGEA 2006


Inte

rest

rat

eImplication of fixed exchange rates in this case:

No reason for the IS curve to move (further).

This condition is not moving either!

LM

AB

IS´

C

Figure 10.13

Output


©EGEA 2006


Inte

rest

rat

eThe central bank has to move LM to the right to

maintain the fixed exchange rate.

LM

IS´

C

Figure 10.13

Output


©EGEA 2006

LM´


Inte

rest

rat

eThe central bank has to move LM to the right to

maintain the fixed exchange rate.

Fiscal policy is effective for changing output.

LM

IS´

C

Note: M0 increased by forex purchases of the central bank.

Figure 10.13

Output


©EGEA 2006


Inte

rest

rat

eReview: Demand disturbance, fixed exchange

rate, no capital controls

LM

IS

A

Figure 10.13

Output


©EGEA 2006


Inte

rest

rat



LM

IS

A

IS´

Figure 10.13

Output

C


©EGEA 2006

LM´


Inte

rest

rat



LM

IS

A

IS´

Figure 10.13

Output

C


©EGEA 2006






Effect on real GDP


Table 10.04


©EGEA 2006


Inte

rest

rat

eCompare: Demand disturbance, fixed exchange

rate, with capital controls

LM

IS

A

Figure 10.13

Output


©EGEA 2006


Inte

rest

rat

eCompare: Demand disturbance, fixed exchange

rate, with capital controls

LM

IS

A

IS´

Figure 10.13

Output

B

Note: central bank independence is possible for a short-time now


©EGEA 2006

Figure 10.14

Argentina 1993-2003

-5

0

5

10

15

20

25

30

35

40

45

50

1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1

0.2

0.4

0.6

0.8

1

Inflation (left scale) Dollar per peso (right scale)


©EGEA 2006

Policy mix

Figure 10.15


©EGEA 2006


Inte

rest

rat

e

LM

IS

A

Policy mix: monetary policy moves with fiscal policy deliberately to change output holding i=i*

Figure 10.15

Output


©EGEA 2006


Inte

rest

rat

e

LM

IS

A

Policy mix: monetary policy moves with fiscal policy deliberately to change output holding i=i*

B

IS´

LM´ M0 increased by securities purchases by central bank.

Figure 10.15

Output


©EGEA 2006

Financial disturbance, fixed exchange rate

Figure 10.16


©EGEA 2006

i*

Inte

rest

rat

e

IS

Increase in rate of return on foreign assets,fixed exchange rate

LM

A

Figure 10.16

Output


©EGEA 2006

i*

Inte

rest

rat

e

LM

IS


A

i*´


Figure 10.16

Output

Note: M0 will fall due to forex sales by central bank.


©EGEA 2006

i*

Inte

rest

rat

e

LM

IS

B


LM´

A

i*´


Note: M0 will fall due to forex sales by central bank.

Figure 10.16

Output


©EGEA 2006






Effect on real GDP


Table 10.04


©EGEA 2006

A devaluation

Figure 10.17


©EGEA 2006


Inte

rest

rat

e

LM

IS

A

To devalue the currency the central bank will bid up the price of foreign money, creating more M0

Output

Figure 10.17


©EGEA 2006


Inte

rest

rat

e

LM

IS

A


LM´

Output

Figure 10.17


©EGEA 2006


Inte

rest

rat

e

LM

IS

A


IS´

LM´

Lower S increases demand for goods.

Output

Figure 10.17

C


©EGEA 2006

Demand disturbance, flexible exchange rates

Figure 10.18


©EGEA 2006


Inte

rest

rat

e

LM

A

Real demand increases…

IS

Output

Figure 10.18


©EGEA 2006


Inte

rest

rat

e

LM

A

Real demand increases…

IS´IS

B

Output

Figure 10.18

However, the resulting increase in S will reduce the demand for goods.


©EGEA 2006


Inte

rest

rat

e

LM

IS

A

…i>i* will attract capital inflows, so S appreciates

B

IS´

However, the resulting increase in S will reduce the demand for goods.

Output

Figure 10.18


©EGEA 2006






Effect on real GDP


Table 10.04


©EGEA 2006

Monetary policy under flexible exchange rates

Figure 10.19


©EGEA 2006


Inte

rest

rat

e

LM

IS

A

Increase in money supply lowers the interest rate

IS´

C

LM´

B

Exchange rate depreciates increasing the demand for goods.

Output

Figure 10.19


©EGEA 2006






Effect on real GDP


Table 10.04


©EGEA 2006






Effect on real GDP


Table 10.04

Fixed exchange rates


Exogenous monetary instrument Exchange rate Money supply

Endogenous monetary instrument Money supply Exchange rate

Documents

Burda, WyploszMACROECONOMIA: UNA PROSPETTIVA EUROPEA ©EGEA 2006 Capitolo 10 Domanda Aggregata, Prodotto, e Tasso di Interesse