Chapter 25 Rational Expectations: Implications for Policy.

Slides:



Advertisements
Similar presentations
Rational Expectations: Implications for Policy
Advertisements

Aggregate demand and aggregate supply model A model that explains short-run fluctuations in real GDP and the price level.
Rational Expectations and the Efficient Market Hypothesis.
© 2008 Pearson Addison-Wesley. All rights reserved Introduction to Macroeconomics Chapter 1.
Macroeconomics fifth edition N. Gregory Mankiw PowerPoint ® Slides by Ron Cronovich macro © 2002 Worth Publishers, all rights reserved Topic 11: Aggregate.
New Classical Macro and New Keynesian Macro
Rational Expectations and the New Keynesian Model After World War II, economists, argued that government intervention could be used to influence employment.
Chapter 28 Inflation: Causes and Consequences. Copyright © 2005 Pearson Addison-Wesley. All rights reserved Figure 28.1 Consumer Price Level in.
10. The Relationship between Unemployment and Inflation
Introduction Macroeconomics is the study of the structure and performance of national economies and of the government policies used to influence economic.
Chapter 11 Classical Business Cycle Analysis: Market-Clearing Macroeconomics Copyright © 2012 Pearson Education Inc.
Classical Economics: Laissez - Faire
Chapter 2 Application Layer. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2-2.
Spectrum of Macroeconomic Thought Marx Radical Political Economy Kalecki Post- Keynesian Keynes Keynesian (hydraulic Keynesians) Monetarist Friedman New.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 8 Inflation: Its Causes and Cures.
Chapter 13 Unemployment and Inflation Economics 282 University of Alberta.
Macroeconomics fifth edition N. Gregory Mankiw PowerPoint ® Slides by Ron Cronovich macro © 2002 Worth Publishers, all rights reserved CHAPTER NINETEEN.
C h a p t e r sixteen © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. Prepared by: Fernando & Yvonn.
New Classical Economics Chapter 12 Prof. Steve Cunningham Intermediate Macroeconomics ECON 219.
Chapter 22 Aggregate Demand and Supply Analysis. Copyright © 2007 Pearson Addison-Wesley. All rights reserved Aggregate Demand The relationship.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 1 What Is Macroeconomics?
Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Chapter 17 Stabilization in an Integrated World Economy.
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 18 Conclusion: Where We Stand.
Chapter 6 Human Capital. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 6-2.
Economics 282 University of Alberta
Applied Macroeconomics Dr. Ming-Jang Weng Dept. of Applied Economics National Univ. of Kaohsiung Taiwan.
Copyright © 2002 Pearson Education, Inc. Slide 26-1 Money Supply Growth and the Business Cycle: Money Growth LEADS Output Growth.
Chapter 12 Keynesian Business Cycle Analysis: Non–Market-Clearing Macroeconomics Copyright © 2012 Pearson Education Inc.
Chapter 14 New Keynesian Economics: Sticky Prices Copyright © 2014 Pearson Education, Inc.
Chapter 17: Stabilization in an Integrated World Economy
Classical Business Cycle Analysis: Market-Clearing Macroeconomics
Rational Expectations: Implications for Policy
Stabilization in an Integrated World Economy
Chapter 16 Resources and the Environment at the Global Level.
PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved. Chapter 12 Modern Keynesian Theory with Rational Expectations.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 17 New Classical Macro Confronts New Keynesian Macro.
Ch. 16: Expectations Theory and the Economy
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved CHAPTER 12 The Phillips Curve and Expectations.
Stabilization in an Integrated World Economy
Rational Expectations and the Lucas Critique Scarth Chapter 5 Makroekonomi 2, S1, FEUI, 2009 – Arianto A. Patunru.
© 2008 Pearson Addison-Wesley. All rights reserved 12-1 Chapter Outline Unemployment and Inflation: Is There a Trade- Off? The Problem of Unemployment.
MACROECONOMICS © 2011 Worth Publishers, all rights reserved S E V E N T H E D I T I O N PowerPoint ® Slides by Ron Cronovich N. Gregory Mankiw C H A P.
LECTURE 8 Stabilization policy Øystein Børsum 7 th March 2006.
Expectations and Macroeconomics In the long run workers experience no money illusion which means, actual and natural unemployment rates are one and the.
1 Ch. 15: Expectations Theory and the Economy James R. Russell, Ph.D., Professor of Economics & Management, Oral Roberts University ©2005 South-Western.
Copyright  2011 Pearson Canada Inc Chapter 27 Rational Expectations Theory or New Classical Macroeconomic Theory.
Eco 200 – Principles of Macroeconomics Chapter 16: Alternative macroeconomic models.
Principles of Macroeconomics Chapter 16: Alternative macroeconomic models.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 25 The Difference between Short-Run and Long-Run Macroeconomics.
Abel & Bernanke Ch. 8, Key Macroeconomic Theories of the Business Cycle.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 24 From the Short Run to the Long Run: The Adjustment of Factor Prices.
Chapter 13 Unemployment and Inflation Copyright © 2016 Pearson Canada Inc.
PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved. Chapter 24 Different Views on How Monetary Policy Affects.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Chapter 23 Aggregate Demand and Supply Analysis.
19 Current Issues in Macro Theory and Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Eco 200 – Principles of Macroeconomics Chapter 15: Macroeconomic Policy.
Expectations and Macroeconomic Stabilization Policies Adaptive and Rational Expectations.
© 2008 Pearson Addison-Wesley. All rights reserved Chapter 12 Unemployment and Inflation.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.
Copyright © 2005 Pearson Education Canada Inc.15-1 Chapter 15 Issues in Stabilization Policy.
Aggregate demand and aggregate supply. Lecture 6 1.
INFLATION AND UNEMPLOYMENT IS-LM MODEL RATIONAL EXPECTATIONS - MONETARY POLICY IN THE SHORT-RUN Lecture 8 Monetary policy.
© 2008 Pearson Education Canada
An Introduction to Macroeconomics
Eco 200 – Principles of Macroeconomics
An Introduction to Macroeconomics
Rational Expectations: Implications for Policy
Rational Expectations: Implications for Policy
Rational Expectations: Implications for Policy
Presentation transcript:

Chapter 25 Rational Expectations: Implications for Policy

Copyright © 2007 Pearson Addison-Wesley. All rights reserved Econometric Policy Critique Econometric models are used to forecast and to evaluate policy Lucas critique, based on rational expectations, argues that policy evaluation should not be made with these models  The way in which expectations are formed (the relationship of expectations to past information) changes when the behavior of forecasted variables changes  The public’s expectations about a policy will influence the response to that policy

Copyright © 2007 Pearson Addison-Wesley. All rights reserved New Classical Macroeconomic Model All wages and prices are completely flexible with respect to expected change in the price level Workers try to keep their real wages from falling when they expect the price level to rise Anticipated policy has no effect on aggregate output and unemployment Unanticipated policy does have an effect Policy ineffectiveness proposition

Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 25-4

Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 25-5

Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 25-6

Copyright © 2007 Pearson Addison-Wesley. All rights reserved Implications for Policymakers Distinction between effects of anticipated and unanticipated policy actions Policymakers must know expectations to know outcome of the policy  Nearly impossible to find out expectations  People will adjust expectations guessing what the policymaker will do Design policy rules so prices will remain stable

Copyright © 2007 Pearson Addison-Wesley. All rights reserved New Keynesian Model Objection to complete wage and price flexibility  Labor contracts  Reluctance by firms to lower wages  Fixed-price contracts  Menu costs Model assumes rational expectations but wages and prices are sticky

Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 25-9

Copyright © 2007 Pearson Addison-Wesley. All rights reserved Implications for Policymakers There may be beneficial effects from activist stabilization policy Designing the policy is not easy because the effect of anticipated and unanticipated policy is very different Must understand public’s expectations

Copyright © 2007 Pearson Addison-Wesley. All rights reserved

Copyright © 2007 Pearson Addison-Wesley. All rights reserved

Copyright © 2007 Pearson Addison-Wesley. All rights reserved

Copyright © 2007 Pearson Addison-Wesley. All rights reserved

Copyright © 2007 Pearson Addison-Wesley. All rights reserved Stabilization Policy Traditional  It is possible for an activist policy to stabilize output fluctuations New Classical  Activist stabilization policy aggravates output fluctuations New Keynesian  Anticipated policy does matter to output fluctuations  More uncertainty about the outcome than Traditional

Copyright © 2007 Pearson Addison-Wesley. All rights reserved

Copyright © 2007 Pearson Addison-Wesley. All rights reserved

Copyright © 2007 Pearson Addison-Wesley. All rights reserved

Copyright © 2007 Pearson Addison-Wesley. All rights reserved Credibility in Fighting Inflation Public must expect the policy will be implemented New Classical  Cold turkey New Keynesian  More gradual approach Actions speak louder than words

Copyright © 2007 Pearson Addison-Wesley. All rights reserved Impact of the Rational Expectations Revolution Expectations formation will change when the behavior of forecasted variables changes Effect of a policy depends critically on the public’s expectations about that policy Empirical evidence on policy ineffectiveness proposition is mixed Credibility is essential to the success of anti- inflation policies Less fine-tuning and more stability