Post on 11-May-2015
description
transcript
19/08/2012
1
10Causes of Inflation
and the Philips Curve
Causes of Inflation
Definition and Measurement
� Definition: Inflation is a continuous increase
in the general price level.
� Measurement: Percentage change in the
general price level.
ππππt = [( Pt - Pt-1)/ Pt-1].100 (%)
� General price level: measured by either
Consumer Price Index (CPI) or GDP deflator
(DGDP).
19/08/2012
2
Category of Inflation
� Mild inflation
� High inflation:
� Hyper inflation: According to Philip
Cagan, inflation rate being from 50% per
month to 13.000% per year.
0
2
4
6
8
10
12
14
16
1960 1965 1970 1975 1980 1985 1990 1995 2000
% per year
inflation rate inflation rate trend
Figure 1 Inflation in the US, 1960-2002
6
Chỉ số giá tháng 10 năm 2008 so với (%) Chỉ số giá 10 tháng đầu năm
2008 so với cùng kỳ năm
2007
Kỳ gốc năm 2005
Tháng 10 năm 2007
Tháng 12 năm 2007
Tháng 9 năm 2008
CHỈ SỐ GIÁ TIÊU DÙNG 148,20 126,72 121,64 99,81 123,15
I. Hàng ăn và dịch vụ ăn uống 172,14 140,56 132,12 99,58 136,95
Trong đó: 1- Lương thực 201,99 160,06 151,41 98,09 149,58
2- Thực phẩm 161,16 132,82 124,44 100,01 133,05
3. Ăn uống ngoài gia đình 169,86 139,54 131,37 100,47 131,92
II. Đồ uống và thuốc lá 128,32 113,27 111,34 100,67 110,21
III. May mặc, mũ nón, giầy dép 126,05 112,55 110,82 100,70 109,81
IV. Nhà ở và vật liệu xây dựng (*) 148,40 122,84 116,76 98,92 122,39
V. Thiết bị và đồ dùng gia đình 125,94 111,99 111,26 100,73 108,36
VI. Dược phẩm, y tế 123,00 109,76 108,75 100,58 108,72
VII. Phương tiện đi lại, bưu điện 138,44 124,82 119,56 99,06 116,66
Trong đó: Bưu chính viễn thông 83,46 89,21 90,39 99,82 88,44
VIII. Giáo dục 115,02 106,71 106,56 100,69 103,63
IX. Văn hoá, thể thao, giải trí 115,74 109,50 109,30 100,38 105,03
X. Đồ dùng và dịch vụ khác 132,35 114,65 111,69 100,85 113,11
Vietnam’s CPI in 2008
19/08/2012
3
Typical Hyper inflation in the World
Germany Russia China Greece Hungary Bolivia Nicaragua
Begin 8/1922 12/1921 2/1947 11/1943 8/1945 4/1984 4/1987
End 11/1923 1/1924 3/1949 11/1944 7/1946 9/1985 3/1991
No. of months 16 26 26 13 12 18 48
Ratio of
begin/end price1,02(1010) 1,24(105) 4,15(106) 4,7(108) 3,81(1027) 1028,5 5,53(105)
Average inflation
rate per month (%)
322 57 79,7 365 19800 48,1 46,45
Highest inflation
rate per month (%)
32400 213 919,9 85,5(106) 41,9(1015) 182,8 261,15
Money growth and inflation in four typical inflation
Period Monthly Inflation rate
%
Money growth
%
GermanyGreeceHungaryPoland
8/1922 => 11/192311/1943 => 11/19448/1945 => 7/19461/1923 => 1/1924
322%365%
19,800%81.4%
314%220%
12,200%72.2%
Source: Philip Cagan: The Monetary Dynamics of Hyperinflation, in Milton Friedman, ed.,
Studies in the Quantity Theory of Money (Chicago: University of Chicago press, 1956), p.26
INTERNATIONAL COMPARISON OF MONEY AND PRICE INDICES (1990-2003)
CountryAnnual growth
of GDP deflator
Annual growth
of CPI
Annual growth
of food price
Vietnam 11.6 2.8 -
China 4.9 6.0 11.3
The Philippines 7.7 7.3 6.7
Indonesia 15.3 13.9 16.1
Malaysia 3.4 3.1 4.3
Thailand 3.4 4.1 4.6
South Korea 4.8 4.5 4.8
Singapore 0.6 1.3 1.4
Source: WDI 2005
19/08/2012
4
10
Theories of Inflation
A. Causes of inflation1. Demand-pull inflation: An increase in
aggregate demand
2. Cost-push inflation: An increase in prices of factors of production. Examples:• An increase in wage level.
• An increase in input prices
3. Inertial inflation
11
Fig.2 Demand-pull inflation
Fig.3 Cost-push inflation
P
P1
P0
AS0
E0
E1
AS1
Y1 Y* Y
AD0AD1
AS1P
P2
P1
AD2
Y* Y2 Y
AD0
12
Figure 4 Inertial inflation
P
P3
P2
P1
Y* Y
AS2
AD1
AD2
AD3
AS1
AS3
19/08/2012
5
B. Monetary approach to inflation• Central insight: Changes in money supply is the
root cause of changes in the general price level.
• M. Friedman: “Inflation is always and
everywhere a monetary phenomenon... and it occurs only when money grows faster than does
output”
• Quantity theory of money:
MV = PY
V = V
So: % change in P (π) =
= % change in M - % change in Y
Monetary approach to inflation
• Policy implications:
�Tightening money supply is a core
solution to control inflation.
�Tightening fiscal policy, too.
Fig.5 International data on money growth and inflation
Inflation rate(percent, logarithmicscale)
1,000
10,000
100
10
1
0.1
Money supply growth (percent, logarithmic scale)0.1 1 10 100 1,000 10,000
Nicaragua
Angola
Brazil
Bulgaria
Georgia
Kuwait
USA
JapanCanada
Germany
Oman
Democratic Republicof Congo
Data for more than 100 countries in 1990s: Average growth of M1 and π
19/08/2012
6
16
1
10
100
1000
10000
percent growth
Israel
1983-85
Poland
1989-90
Brazil
1987-94
Argentina
1988-90
Peru
1988-90
Nicaragua
1987-91
Bolivia
1984-85
inflation growth of money supply
Fig.6 Money growth and inflation in typical hyper inflation cases
Inflation in Vietnam, 1987-2004
1987-1989
1990-1994
1995-1999
2000-2004
1987-2004
Growth of CU 286.9 44.8 25.9 27.3 78.9
Growth of M1 286.9 44.8 25.9 27.3 78.9
Growth of M2 318.3 43.5 27.2 22.7 84.3
Openness degree 44.9 57.2 75.3 104.9 71.6
GDP growth rate 4.77 7.30 7.51 7.23 6.90
Inflation rate by CPI 217.2 34.3 6.02 4.33 48.3
Inflation rate by DGDP 281.1 36.4 9.38 3.76 63.9
Fig.7 Inflation rate and money growth rate in Vietnam,
1988-2004
-100
0
100
200
300
400
500
600
700
800
900
1987
1989
1991
1993
1995
1997
1999
2001
2003
Lạm phát M2
19/08/2012
7
Inflation Tax (IT) and Seiniorage (SE)
• Seiniorage is the revenue earned by
government from printing money.
• Inflation tax: Inflation reduces purchasing power of money in circulation.
PP
P
P
M
P
P
PPP
PPPM
PP
M
P
M
∆+
∆=
∆+
−∆+=
∆+−
)(
PP
P
P
M
M
M
PP
M
∆+
∆=
∆+
∆
20
ThuÕ ®óc tiÒn ë mét sè n−íc, 1975-90*
N−íc % so víi nguån thu ngoµithuÕ ®óc tiÒn
% GDP
Mü 6,02 1,17Canada 6,61 1,26Anh 5,31 1,91Italia 28,00 6,60Ph¸p 7,19 2,73§øc 3,85 1,08Bolivia** 139,5 5,00Brazil 18,36 4,13Chile 7,48 2,39Ên ®é 14,30 1,81Hµn quèc 10,70 1,84Mªhic« 18,70 2,71Philippines 7,79 0,99Thai lan 7,06 0,94Thæ nhÜ kú 24,40 5,09Vªnzuela 10,76 3,05Peru 29,71 4,92Israel 24,55 2,99
*TÝnh trung b×nh n¨m**cña giai ®o¹n 1977-1985
Nguån : J. D. Sachs and F. Larrain, Macroeconomics in the Global Economy, trang 341.
Inflation and economic growth relation
�T. Killick (1981): U-turn shape relation between inflation and economic growth:− Inflation has positive impacts on economic growth at
a low level, while it has negative impacts on econ. growth at high level.
�M. Khan and A. Senhadji (2000), with data on 140 countries in the period 1960-1998: Inflation has an influence on the threshold of economic growth. The range of optimal inflation rate is:− 1-3% per year for industrial countries, and
− 7-11% per year for developing countries
19/08/2012
8
Fig.8 U-turn shape relation between inflation and economic growth
gY
ππππππππ*
gYmax
Controlling inflation
• Tightened fiscal policy• Reducing G or
increasing T results in
a reduction in Y and P.• Costs of reducing
inflation is lower Y and
higher UP1
Y1 Y
P
SAS
AD1
Eo
Po
Y0
E1
ADo
LAS
Controlling inflation
P1
Y1 Y
P
SAS
AD1
Eo
Po
Y0
E1
ADo
LAS
• Tightened monetary
policy• Contractionary
monetary policy results in higher interest rate,
which in turn reduces investment, and thus Y.
• Costs of reducing
inflation is lower Y and higher U
19/08/2012
9
The Short-Run Tradeoff between Inflation and
Unemployment : Philips Curve
Unemployment and Inflation
• The natural rate of unemployment depends on
various features of the labor market.
• Examples include minimum-wage laws, the
market power of unions, the role of efficiency wages, and the effectiveness of job search.
• The inflation rate depends primarily on growth in the quantity of money, controlled by the
Fed.
Unemployment and Inflation
• Society faces a short-run tradeoff between
unemployment and inflation.
• If policymakers expand aggregate demand,
they can lower unemployment, but only at the cost of higher inflation.
• If they contract aggregate demand, they can lower inflation, but at the cost of temporarily
higher unemployment.
19/08/2012
10
THE PHILLIPS CURVE
• The Phillips curve illustrates the
short-run relationship between inflation and unemployment.
Figure 9 The Phillips Curve
UnemploymentRate (percent)
0
InflationRate
(percentper year)
Phillips curve
4
B6
7
A2
Aggregate Demand, Aggregate Supply, and the Phillips Curve
• The Phillips curve shows the short-
run combinations of unemployment and inflation that arise as shifts in the aggregate demand curve move the
economy along the short-run aggregate supply curve.
19/08/2012
11
Aggregate Demand, Aggregate Supply, and the Phillips Curve
• The greater the aggregate demand for
goods and services, the greater is the
economy’s output, and the higher is the
overall price level.
• A higher level of output results in a lower
level of unemployment.
Figure 8 How the Phillips Curve is Related to Aggregate Demand and Aggregate Supply
Quantityof Output
0
Short-run
aggregate
supply
(a) The Model of Aggregate Demand and Aggregate Supply
UnemploymentRate (percent)
0
InflationRate
(percentper year)
PriceLevel
(b) The Phillips Curve
Phillips curveLow aggregate
demand
High
aggregate demand
(output is
8,000)
B
4
6
(output is
7,500)
A
7
2
8,000
(unemployment
is 4%)
106 B
(unemployment
is 7%)
7,500
102 A
SHIFTS IN THE PHILLIPS CURVE: THE ROLE OF EXPECTATIONS
• The Phillips curve seems to offer
policy-makers a menu of possible inflation and unemployment outcomes.
19/08/2012
12
The Long-Run Phillips Curve
• In the 1960s, Friedman and Phelps
concluded that inflation and
unemployment are unrelated in the long
run.
• As a result, the long-run Phillips curve is vertical at the natural rate of unemployment.
• Monetary policy could be effective in the short run but not in the long run.
Figure 9 The Long-Run Phillips Curve
UnemploymentRate
0 Natural rate of
unemployment
InflationRate Long-run
Phillips curve
BHigh
inflation
Low
inflation
A
2. . . . but unemployment
remains at its natural rate
in the long run.
1. When the
Fed increases
the growth rate
of the money
supply, the
rate of inflation
increases . . .
Figure 10 How the Phillips Curve is Related to Aggregate Demand and Aggregate Supply
Quantityof Output
Natural rate
of output
Natural rate of
unemployment
0
PriceLevel
P
Aggregate
demand, AD
Long-run aggregate
supply
Long-run Phillips
curve
(a) The Model of Aggregate Demand and Aggregate Supply
UnemploymentRate
0
InflationRate
(b) The Phillips Curve
2. . . . raises
the price
level . . .
1. An increase in
the money supply
increases aggregate
demand . . .
A
AD2
B
A
4. . . . but leaves output and unemployment
at their natural rates.
3. . . . and
increases the
inflation rate . . .
P2B
19/08/2012
13
Expectations and the Short-Run Phillips Curve
• Expected inflation measures how much
people expect the overall price level to
change.
• In the long run, expected inflation adjusts to changes in actual inflation.
• The Fed’s ability to create unexpected inflation exists only in the short run.
• Once people anticipate inflation, the only way to get unemployment below the natural rate is for actual inflation to be above the anticipated rate.
• This equation relates the unemployment
rate to the natural rate of
unemployment, actual inflation, and
expected inflation.
Expectations and the Short-Run Phillips Curve
( )Natural rate of unemployment - a Actual inflation
Expected inflation−
Unemployment Rate =
Figure 11 How Expected Inflation Shifts the Short-Run Phillips Curve
UnemploymentRate
0 Natural rate of
unemployment
InflationRate Long-run
Phillips curve
Short-run Phillips curve
with high expected
inflation
Short-run Phillips curve
with low expected
inflation
1. Expansionary policy moves
the economy up along the
short-run Phillips curve . . .
2. . . . but in the long run, expected
inflation rises, and the short-run
Phillips curve shifts to the right.
CB
A
19/08/2012
14
The Natural Experiment for the Natural-Rate Hypothesis
• The view that unemployment
eventually returns to its natural rate, regardless of the rate of inflation, is called the natural-rate hypothesis.
• Historical observations support the
natural-rate hypothesis.
The Natural Experiment for the Natural Rate Hypothesis
• The concept of a stable Phillips curve
broke down in the in the early ’70s.
• During the 1970’s and 1980’s, the economy experienced high inflation and high unemployment
simultaneously.
Figure 12 The Phillips Curve in the 1960s
1 2 3 4 5 6 7 8 9 100
2
4
6
8
10
UnemploymentRate (percent)
Inflation Rate(percent per year)
1968
1966
19611962
1963
1967
1965
1964
19/08/2012
15
Figure 13 The Breakdown of the Phillips Curve
1 2 3 4 5 6 7 8 9 100
2
4
6
8
10
UnemploymentRate (percent)
Inflation Rate(percent per year)
1973
1966
1972
1971
19611962
1963
1967
1968
1969 1970
19651964
SHIFTS IN THE PHILLIPS CURVE: THE ROLE OF SUPPLY SHOCKS
• Historical events have shown that the short-run
Phillips curve can shift due to changes in expectations.
• The short-run Phillips curve also shifts because of shocks to aggregate supply.
• Major adverse changes in aggregate supply can worsen the short-run tradeoff between unemployment and inflation.
• An adverse supply shock gives policymakers a less favorable tradeoff between inflation and
unemployment.
SHIFTS IN THE PHILLIPS CURVE: THE ROLE OF SUPPLY SHOCKS
• A supply shock is an event that directly
alters the firms’ costs, and, as a result, the
prices they charge.
• This shifts the economy’s aggregate
supply curve. . .
• . . . and as a result, the Phillips curve.
19/08/2012
16
Figure 14 An Adverse Shock to Aggregate Supply
Quantityof Output
0
PriceLevel
Aggregate
demand
(a) The Model of Aggregate Demand and Aggregate Supply
UnemploymentRate
0
InflationRate
(b) The Phillips Curve
3. . . . and
raises
the price
level . . .
AS2 Aggregate
supply, AS
A
1. An adverse
shift in aggregate
supply . . .
4. . . . giving policymakers
a less favorable tradeoff
between unemployment
and inflation.
BP2
Y2
PA
Y
Phillips curve, PC
2. . . . lowers output . . .
PC2
B
SHIFTS IN THE PHILLIPS CURVE: THE ROLE OF SUPPLY SHOCKS
• In the 1970s, policymakers faced two
choices when OPEC cut output and raised
worldwide prices of petroleum.
• Fight the unemployment battle by expanding aggregate demand and
accelerate inflation.
• Fight inflation by contracting aggregate
demand and endure even higher
unemployment.
Figure 15 The Supply Shocks of the 1970s
1 2 3 4 5 6 7 8 9 100
2
4
6
8
10
UnemploymentRate (percent)
Inflation Rate(percent per year)
1972
19751981
1976
1978
1979
1980
1973
1974
1977
19/08/2012
17
THE COST OF REDUCING INFLATION
• To reduce inflation, the Fed has to pursue
contractionary monetary policy.
• When the Fed slows the rate of money
growth, it contracts aggregate demand.
• This reduces the quantity of goods and
services that firms produce.
• This leads to a rise in unemployment.
Figure 16 Disinflationary Monetary Policy in the Short Run and the Long Run
UnemploymentRate
0 Natural rate of
unemployment
InflationRate
Long-run
Phillips curve
Short-run Phillips curve
with high expected
inflation
Short-run Phillips curve
with low expected
inflation
1. Contractionary policy moves
the economy down along the
short-run Phillips curve . . .
2. . . . but in the long run, expected
inflation falls, and the short-run
Phillips curve shifts to the left.
BC
A
THE COST OF REDUCING INFLATION
• To reduce inflation, an economy must endure
a period of high unemployment and low output.
• When the Fed combats inflation, the economy moves down the short-run Phillips curve.
• The economy experiences lower inflation but at the cost of higher unemployment.
19/08/2012
18
THE COST OF REDUCING INFLATION
• The sacrifice ratio is the number of
percentage points of annual output that
is lost in the process of reducing inflation
by one percentage point.
• An estimate of the sacrifice ratio is five.
• To reduce inflation from about 10% in 1979-
1981 to 4% would have required an estimated sacrifice of 30% of annual output!
Summary
• The Phillips curve describes a negative
relationship between inflation and unemployment.
• By expanding aggregate demand, policymakers can choose a point on the Phillips curve with
higher inflation and lower unemployment.
• By contracting aggregate demand, policymakers
can choose a point on the Phillips curve with
lower inflation and higher unemployment.
Summary
• The tradeoff between inflation and
unemployment described by the Phillips
curve holds only in the short run.
• The long-run Phillips curve is vertical at
the natural rate of unemployment.
19/08/2012
19
Summary
• The short-run Phillips curve also shifts
because of shocks to aggregate supply.
• An adverse supply shock gives
policymakers a less favorable tradeoff
between inflation and unemployment.
Summary
• When the Fed contracts growth in the
money supply to reduce inflation, it
moves the economy along the short-run
Phillips curve.
• This results in temporarily high
unemployment.
• The cost of disinflation depends on how
quickly expectations of inflation fall.