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Inflation, Unemployment, and Federal Reserve Policy

Inflation, Unemployment, and Federal Reserve Policy. The Discovery of the Short-Run Tradeoff Between Unemployment and Inflation. 1. LEARNING OBJECTIVE. Phillips curve A curve showing the short-run relationship between the unemployment rate and the inflation rate.

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Inflation, Unemployment, and Federal Reserve Policy

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  1. Inflation, Unemployment, and Federal Reserve Policy

  2. The Discovery of the Short-Run Tradeoff Between Unemployment and Inflation 1 LEARNING OBJECTIVE Phillips curve A curve showing the short-run relationship between the unemployment rate and the inflation rate.

  3. The Discovery of the Short-Run Tradeoff Between Unemployment and Inflation The Phillips Curve 16 - 1 Explaining the Phillips Curve with Aggregate Demand and Aggregate Supply Curves

  4. The Discovery of the Short-Run Tradeoff Between Unemployment and Inflation 16 - 1 1 LEARNING OBJECTIVE Is the Phillips Curve a Policy Menu? Structural relationship A relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods. The Policy Menu View of the Phillips Curve

  5. The Discovery of the Short-Run Tradeoff Between Unemployment and Inflation Is the Short-Run Phillips Curve Stable? The Long-Run Phillips Curve Natural rate of unemployment The unemployment rate that exists when the economy is at potential GDP.

  6. The Discovery of the Short-Run Tradeoff Between Unemployment and Inflation 16 - 3 A Vertical Long-Run Aggregate Supply Curve Means a Vertical Long-Run Phillips Curve The Long-Run Phillips Curve

  7. The Discovery of the Short-Run Tradeoff Between Unemployment and Inflation The Impact of Unexpected Price Level Changes on the Real Wage 16 – 1 16 – 2 The Basis for the Short-Run Phillips Curve The Role of Expectations of Future Inflation

  8. The Short-Run and Long-Run Phillips Curves 2 LEARNING OBJECTIVE The Short-Run Phillips Curve of the 1960s and the Long-Run Phillips Curve 16 - 4

  9. The Short-Run and Long-Run Phillips Curves 16 - 5 Expectations and the Short-Run Phillips Curve Shifts in the Short-Run Phillips Curve

  10. The Short-Run and Long-Run Phillips Curves 16 - 6 A Short-Run Phillips Curve for Every Expected Inflation Rate Shifts in the Short-Run Phillips Curve

  11. The Short-Run and Long-Run Phillips Curves 16 - 7 The Inflation Rate and the Natural Rate of Unemployment in the Long-Run How Does a Vertical Long-Run Phillips Curve Affect Monetary Policy?

  12. 16 - 2 2 LEARNING OBJECTIVE 16-2 • Does the Natural Rate of Unemployment Ever Change? • Frictional or structural unemployment can change – thereby changing the natural rate – for several reasons: • Demographic changes. • Labor market institutions. • Past high rates of unemployment. What makes the natural rate of unemployment increase or decrease? Changing Views of the Phillips Curve

  13. Expectations of the Inflation Rate 3 LEARNING OBJECTIVE • The experience in the United States over the past 50 years indicates that how workers and firms adjust their expectations of inflation depends on how high the inflation rate is. There are three possibilities: • Low inflation. • Moderate, but stable inflation. • High and unstable inflation. Rational expectationsExpectations formed by using all available information about an economic variable.

  14. Expectations of the Inflation Rate 16 - 8 Rational Expectations and the Phillips Curve The Effect of Rational Expectations on Monetary Policy

  15. Expectations of the Inflation Rate Is the Short-Run Phillips Curve Really Vertical? Real Business Cycle Models Real business cycle models Models that focus on real rather than monetary explanations of fluctuations in real GDP.

  16. How the Fed Fights Inflation Paul Volcker and Disinflation Disinflation A significant reduction in the inflation rate. Don’t Confuse “Disinflation” with “Deflation”

  17. How the Fed Fights Inflation 16 – 3 The Record of Fed Chairmenand Inflation Alan Greenspan and the Importance of a Credible Monetary Policy De-emphasizing the Money Supply

  18. How the Fed Fights Inflation The Importance of Fed Credibility Monetary Policy Credibility after Greenspan A Failure of Credibility at the Bank of Japan Federal Reserve Policy and Whirlpool’s “Pricing Power”

  19. Disinflation • Natural rate of unemployment • Phillips curve • Rational expectations • Real business cycle models • Structural relationship

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