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Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Capitolo 13
Domanda Aggregatae Offerta Aggregata
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Aggregate demand and aggregate supply
Fig. 13.01
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Aggregate demand and aggregate supply
Output
Infla
tion
AS
AD
Fig. 13.01
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
IS-LM-BP and AD under fixed exchange rates
Fig. 13.02
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Suppose the inflation rate rises above 0...
Rat
e of
infla
tion
Output
Inte
rest
rat
e
Output
LM
Financialintegration
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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Now suppose the inflation rate falls below 0...
Rat
e of
infla
tion
Output
Inte
rest
rat
e
Output
LM
Financialintegration
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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
AD under fixed exchange rates
Rat
e of
infla
tion
Output
Inte
rest
rat
e
Output
LM
AD
Financialintegration
line
LAD line
IS0
A0
A1
A2
A0A1 A2
Y0Y1 Y2
Y0Y1 Y2
0
1
2
IS2
IS1
Fig. 13.02
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Shifts in the aggregate demand curve
Fig. 13.03
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Financialintegration
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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Aggregate demand and supplyunder fixed exchange rates
Fig. 13.04
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Fiscal policy under fixed exchange rates
Fig. 13.05
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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.
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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´
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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´
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Expansionary monetary policy under a fixed exchange rate regime
Fig. 13.07
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Periodic realignments of the exchange rate
Time
Rea
l exc
hang
e ra
te
*
0 SDevaluation ( )
}}
Fig. 13.07
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
IS-LM-BP and AD under flexible exchange rates
Fig. 13.09
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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´
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Aggregate demand and supplyunder flexible exchange rates
Fig. 13.10
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Monetary policy under flexible exchange rates
Fig. 13.11
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
We start at the equilibrium point A...In
flatio
n
0
AS
AD
LAS
A
Fig. 13.11
Output gap Y -Y( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Fig. 13.13(a)
1965 1975 1985 1995
300
200
100
Oil, metal, and food prices: 1965-1994(1990=100)
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Fig. 13.13(b-d)
Oil Shock: A turning point, pre- and post-1973
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
We start at point A...In
flatio
n
0
AS
AD
LAS
A
Fig. 13.14
Output gap Y -Y( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
Infla
tion
0
AS
AD
LAS
A
Fig. 13.15
Output gap Y -Y( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©EGEA 2006
AD
An adverse demand shockIn
flatio
n
0
AS
AD
LAS
A
B
Fig. 13.15
Output gap Y -Y( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )
Burda, Wyplosz MACROECONOMIA: UNA PROSPETTIVA EUROPEA
©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( )