1 / 18

Inflation and Expectations

Inflation and Expectations. Econ 102 2014 Spring. Phillips Curve. Short-run Phillips Curve: In UK Phillips in 1958 Tradeoff between percentage change in wages and unemployment rate. SR Phillips Curve.

kris
Download Presentation

Inflation and Expectations

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Inflation and Expectations Econ 102 2014 Spring

  2. Phillips Curve • Short-run Phillips Curve: • In UK Phillips in 1958 Tradeoff between percentage change in wages and unemployment rate.

  3. SR Phillips Curve • Wages changes usually lead to price changes hence we see a similar relationship between between percentage change in price level and Unemployment

  4. SR Phillips Curve • What type of policy recommendations does this indicate?

  5. SR Phillips Curve Choose either • Low inflation (high Unemp. rate) or • High inflation (low (low Unemp. rate)

  6. SR Phillips Curve Choose either • Low inflation (high Unemp. rate) or • High inflation (low (low Unemp. rate)

  7. What is behind this trade off? • AD policies or changes... AD P AS E3 E2 E1 Y Potential Y

  8. Supply shock • 1973-1979 two oil price increase by OPEC countries. Cost of production increased which can be seen as the following changes, AS2 P AS AD E2 E1 Y Potential Y

  9. Supply shock • Result is both inflation and unemployment increase. Stagnation STAGNATION Inflation

  10. Stagflation (inflation and unemployment) • AD policies or changes... AS2 P AD AS E2 E1 Y Potential Y

  11. Expectations • Consumer and Producers do not have static views, they look into the future and form ‘expectations’. • They form expectations about future prices, or the rate of change of prices. • In all their consumption, production and labor supply decisions they take the expected inflation rate into consideration. • What is your expected rate of inflation today for the next year in Turkey?

  12. What happened to Phillips Curve • How do we form expectations? • Look back, from the past: Adaptive expectations. • Look at all the information and think rationally: Rational expectations

  13. If you expect inflation? • How will the firms decide on the price of their product? • How will the workers decide for the wage Increases? • How will borrowers and lenders be affected? What happens to the AS curve?

  14. Borrowers and lenders 2013 2014 Fusun will pay to Ahmet 108 TL P=160 Fusun borrowed from Ahmet 100 TL (if r= 8 %) If inflation rate is 60% Then P=100 Will Ahmet be happy? NO How should Ahmet be compensated?

  15. Interest rates under inflation

  16. Wages continue to increase due to higher expected inflation... P AS3 AS2 E3 AS E2 E1 AD Y Potential Y

  17. Aggregate Demand responds withMS increases P AS3 E3 AS2 AS E2 E1 AD3 AD2 AD Y Potential Y

  18. Short-run and Long-run Phillips Curve LONG TUN PHILIPS CURVE Inflation rate SHORT_RUN PHILLIIPS CURVE Unemployment Rate Natural Rate of U

More Related