Brief Outline of Topics Covered in Lecture 14
Chapter 22 Aggregate Demand and Supply Analysis
- Shifts in the AS curve
- Shifts in the SRAS
- Shifts in the LRAS and RBC models
Chapter 24 Money and Inflation
- Inflation
- Monetarist view
- Keynesian view
- Supply shocks
- Always a monetary phenomena?
- How does inflationary policy arise?
- Cost push - demand for higher wages
- Demand pull - shooting at the wrong target
- Budget deficits and inflation
Materials from class:
Video:
Lecture 14 [Google video] - Fall 2007
Lecture 14 [Media Player] - Fall 2007
Economics 470 Lecture 14 |
Previous (these were taped outside of class):
Lecture 14 - Chapter 22, pgs. 569-580; Chapter 24, pgs 613-626
Google Video
Additional Reading:
- Bernanke Sets Plan to Make Fed More Transparent - washingtonpost.com
- Federal Reserve Communications - FRB: Speech--Bernanke
- World too complex for one-size-fits-all models - Dani Rodrik
- International financial stability by design - Vox EU
- The Coming Foreclosure Tsunami - Chris Hayes
- Understanding the Falling Dollar - Brad Setser - washingtonpost.com
- Facts and fallacies about US FDI in China - Vox EU
- China's October Inflation Matches Decade High of 6.5% - Bloomberg
- Subprime crisis: time for an inflation-targeting rethink? - Vox EU
- SpongeBob and the proper role of the State - Salon.com
- Yes, Virginia, the Fed Has an Inflation Target ... And It’s Missing It - WSJ
Application:
Bloomberg's John Berry on changes in Fed transparency:
Fed Changes More Than the Number of Forecasts, by John M. Berry, Bloomberg: Federal Reserve officials are going public with lots of the details missing from their traditional bare-bones forecasts, and they're going to do it four times a year instead of two.
The Federal Open Market Committee announced the changes yesterday in a statement, and Chairman Ben S. Bernanke discussed them in detail in a speech at the Cato Institute in Washington.
One thing the changes won't include is a formal target for inflation. And all the added information being released won't necessarily provide better guidance about what policy makers will do with their overnight lending-rate target at the next FOMC meeting. Minutes of the meetings already provide significant information about participants' views on the short- term economic outlook and the balance of risks to growth and inflation.
But what's really going to be new is that along with all the figures will be explanations that, according to the FOMC statement, ''will provide a fuller discussion of the projections, covering not only the outcomes that most meeting participants see as most likely, but also the risks to the economic outlook and the dispersion of views among policymakers.''
''The changes will provide a more-timely insight into the committee's outlook, will help households and businesses better understand and anticipate how our policy decisions respond to incoming information, and will enhance our accountability for the decisions we make,'' Bernanke said.
That may turn out to be true.
Or maybe households, businesses, investors, financial analysts and Fed watchers will have a hard time knowing just what to make of the mass of new information.
No Better Guidance
The figures will still be a compilation of separate sets of projections from the 19 FOMC participants. Note that that's what the statement calls them, ''projections,'' not forecasts.
This won't be a single forecast hammered out with staff help such as the one in the inflation report released quarterly by the Bank of England's nine-member Monetary Policy Council. The European Central Bank publishes only a staff forecast.
The first set of the expanded projections will be released Nov. 20 as part of the minutes of the Oct. 30-31 FOMC meeting. They will include annual figures for the change in real gross domestic product, personal consumption expenditures, the overall PCE price index and the core PCE price index, which excludes food and energy items. The unemployment rate for each year's fourth quarter will be included.
The change in personal consumption and the overall PCE price index haven't been on the list in the past.
Confusion Possible
The inclusion of a fuller discussion of projections might become confusing for the public if they happen to be quite close to each other. That was the case with the projections for this year and next released in July. They were numerically very close to each other and all were together in the same table.
All the projections are supposed to be based on an assumption of an ''appropriate monetary policy,'' though there is no explanation of what that policy might be. In other words, two policy makers might project similar economic growth and inflation while assuming that a somewhat different interest-rate path would be needed to achieve those results.
In his speech, Bernanke said this array of views is an important source of strength for the FOMC as it works ''to forge a rough consensus regarding the outlook, the risks to the committee's objectives and the appropriate policy response.''
''Diversity of views drives the committee to adopt an eclectic approach and thus serves to limit the risk that a single viewpoint or analytical framework might become unduly dominant,'' he said.
Illuminating Differences
Under the new procedures, ''the additional narrative material that will accompany the numerical projections will illuminate both the consensus of opinion and the differences in judgments that may emerge,'' Bernanke said.
However, this emphasis on the projections might not be entirely justified. After all, most of the Fed Board members and the 12 regional Fed bank presidents who participate on the FOMC -- even the economists among them -- aren't experienced economic forecasters.
As William Poole, the St. Louis Fed president who is a former economics professor, once said, ''I am not a forecaster. I am a consumer of forecasts.''
Still, the changes that came from a 1 1/2-year discussion within the FOMC represent a good-faith attempt to increase transparency at the central bank. Bernanke, an early advocate of having a formal inflation target, explained in his speech why that idea fell by the wayside.
Political Fallout
''A superficial drawback of inflation targeting is its very name, which suggests a single-minded focus on inflation to the exclusion of other goals,'' the chairman said. The Fed has a dual mandate -- price stability and maximum sustainable employment --and setting a target only for inflation essentially might give the impression of favoring one goal over the other, he indicated.
Setting a target for inflation without doing the same for unemployment would have stirred up a political storm among congressional Democrats.
Nevertheless, by projecting figures for economic growth and overall inflation for three years -- it has been only for two years until now -- officials will give a strong signal about what level of inflation they believe is consistent with price stability.