Brief Outline of Topics Covered in Lecture 15
Chapter 24 Money and Inflation
- Debt monetization
- The activist/non-activist debate
- Policy lags and other problems in pursuing activist policies
Chapter 25 Rational Expectations and Implications for Policy
- RE and the Lucas critique
Materials from class:
None for today
Video:
Lecture 15 - Chapter 24, pgs. 626-635; Chapter 25, 639-641
Google Video
Additional Reading:
- Milton Friedman: Why Money Matters
- Kenneth Rogoff: Hedge Fund Transparency and Regulation
- Greenspan's Shadow Needs to Shrink
- Bernanke Says Fannie Mae, Freddie Mac Need to Cut Portfolios, Heed Mission
- Greenspan Predicts 'One-Third Probability' of U.S. Recession This Year
Application:
Productivity and Unit Labor Costs: Revised productivity figures were released today (3/6). The revisions were driven by a large upward revision in labor hours. This had two effects. First, with hours revised upward, output per hour - our measure of productivity - declines. Second, with a decline in productivity, unit labor costs increase. Thus, the other side of this is that with higher labor costs, output prices are more likely to be reset upward. This brings about inflation pressure making the Fed more likely to raise rates at renewed signs of inflation, and less likely to cut rates if signs of weakness show up in the data. (To be clear, the revisions to productivity and labor costs won't be news to the Fed - they were widely advertised and anticipated - so this news is already in the Fed's information set and policy response).
Here are graphs of the year over year percentage change in output per hour for the business sector (the non-farm business sector looks very similar) from 1980 and, for more perspective, from the beginning of the sample in 1947:
The general decline in productivity changes in recent years is notable (and an impediment for those promoting tax cuts as a means of stimulating productivity growth). Will the series level off at, or just under 2%?
For more see: It's Official: Productivity Growth Has Slowed (from Dean Baker who has been publicizing this since the first hints of revisions were given), The Domestic Macroeconomic Outlook (Brad DeLong), US labour costs add to inflation threat (Financial Times, free), and Productivity Revised Lower, Costs Jump (Bloomberg), among others.
Update: In response to comments, let me clarify the statement "The revisions were driven by a large upward revision in labor hours" since it's not as clear as it could be. Here's the statement from the report:
In both the business and nonfarm business sectors, productivity growth for the fourth quarter of 2006 was revised down by 1.4 percentage points from the estimates published February 7, due solely to downward revisions to output. Productivity growth during calendar year 2006 also was less than previously reported in both sectors, but the revisions to annual data were almost entirely explained by upward revisions to hours worked.
