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1、Macroeconomics Chapter 15,1,Money and Business Cycles I:The Price-Misperceptions Model,C h a p t e r 1 5,Macroeconomics Chapter 15,2,Effects of Money in the Equilibrium Business-Cycle Model,In our equilibrium business-cycle model：,real quantity of money demanded,L(Y,i).,Monetary shocks=no effects on
2、 real economy,technology shocks,Macroeconomics Chapter 15,3,Effects of Money in the Equilibrium Business-Cycle Model,If M does not respond to changes in the real quantity demanded,P will move in the direction opposite to the change in L(Y,i).,The model predicts that P would be countercyclical low in
3、 booms and high in recessions.,Macroeconomics Chapter 15,4,Effects of Money in the Equilibrium Business-Cycle Model,If the monetary authority wants to stabilize the price level,P,it should adjust the nominal quantity of money,M,to balance the changes in the real quantity demanded,L(Y,i).,In this cas
4、e,M will be procyclical.,Macroeconomics Chapter 15,5,The Price-Misperceptions Model,The price-misperceptions model provides a possible explanation for the non-neutrality of money.,Empirical evidence suggests that money is not as neutral as predicted by our equilibrium business-cycle model.,Household
5、s sometimes misinterpret changes in nominal prices and wage rates as changes in relative prices and real wage rates.,Macroeconomics Chapter 15,6,The Price-Misperceptions Model,A Model with Non-Neutral Effects of Moneythe important difference from before is that households have incomplete current inf
6、ormation about prices in the economy.,Macroeconomics Chapter 15,7,The Price-Misperceptions Model,Macroeconomics Chapter 15,8,The Price-Misperceptions Model,The price level,P,the relevant variable is the price of a market basket of goods.These goods will be purchased from many locations at various ti
7、mes.Therefore,a worker will typically lack good current information about some of these prices.,denote by Pe the price that a worker expects to pay for a market basket of goods.,Macroeconomics Chapter 15,9,The Price-Misperceptions Model,The effects from an increase in the nominal quantity of moneywh
8、at happens when workers do not understand that an increase in the nominal wage rate,w,stems from a monetary expansion that inflates all nominal values,including the price level,P.,Macroeconomics Chapter 15,10,The Price-Misperceptions Model,Each worker may think instead that the rise in w constitutes
9、 an increase in his or her real wage rate,w/P.The perceived real wage rate is the ratio of w to the expected price level,Pe.This ratio,w/Pe,rises if the expected price level,Pe,increases proportionately by less than w.,If w/Pe increases,the worker increases the quantity of labor supplied,Ls.,Macroec
10、onomics Chapter 15,11,The Price-Misperceptions Model,A Model with Non-Neutral Effects of Moneyw/Pe=(w/P)(P/Pe)for a given actual real wage rate,w/P,an increase in P/Pe raises the perceived real wage rate,w/Pe.if workers are underestimating the price levelso that Pe w/P.,Macroeconomics Chapter 15,12,
11、The Price-Misperceptions Model,Macroeconomics Chapter 15,13,The Price-Misperceptions Model,A Model with Non-Neutral Effects of MoneyBecause of price misperceptions,the increase in P raises the quantity of labor supplied at a given w/P.an increase in the nominal quantity of money,M,that creates an un
12、perceived rise in the price level affects the real economy and is,therefore,non-neutral.Specifically,an increase in M raises the quantity of labor input,L.,Macroeconomics Chapter 15,14,The Price-Misperceptions Model,A Model with Non-Neutral Effects of MoneyThe rise in labor input,L,will lead to an e
13、xpansion of production.That is,real GDP,Y,increases in accordance with the production function:Y=A F(K,L),Macroeconomics Chapter 15,15,The Price-Misperceptions Model,Money is Neutral in the Long RunThe expected price level,Pe,adjusts toward the actual price level,P,in the long run.,Macroeconomics Ch
14、apter 15,16,The Price-Misperceptions Model,Money is Neutral in the Long RunThe effects of an increase in M on these real variables are only temporary.In the long run,an increase in M leaves the real variables unchanged.The price level,P,and the nominal wage rate,w,rise by the same proportion as the
15、increase in M.We conclude that,in the long run,money is neutral.,Macroeconomics Chapter 15,17,The Price-Misperceptions Model,Only Unperceived Inflation Affects Real VariablesLucas hypothesis on monetary shocks:the real effect of a given size monetary shock is larger,the more stable the underlying mo
16、netary environment.,Macroeconomics Chapter 15,18,The Price-Misperceptions Model,Predictions for Economic FluctuationsNow we can use the price-misperceptions model to get alternative predictions of cyclical patterns for macroeconomic variables.In this analysis,we imagine that economic fluctuations re
17、sult from monetary shocksthat is,exogenous variations in the nominal quantity of money,M.,Macroeconomics Chapter 15,19,The Price-Misperceptions Model,Macroeconomics Chapter 15,20,The Price-Misperceptions Model,Empirical EvidencesFriedman and Schwartzs Monetary HistoryChanges in the behavior of the m
18、oney stock have been closely associated with changes in economic activity,money income,and prices.The interrelation between monetary and economic change has been highly stable.Monetary changes have often had an independent origin;they have not been simply a reflection of changes in economic activity
19、.,Macroeconomics Chapter 15,21,The Price-Misperceptions Model,Empirical Evidence on the Real Effects of Monetary ShocksUnanticipated money growthan increase in unanticipated money growth raised real GDP over periods of a year or more.,Macroeconomics Chapter 15,22,The Price-Misperceptions Model,Empir
20、ical EvidenceRomer and Romer on Federal Reserve policyChristina Romer and David Romer(2003)attempt to isolate exogenous monetary shocks.They measured these shocks by looking at changes during meetings of the Federal Reserves Federal Open Market Committee(FOMC)in the target for the Federal Funds rate
21、.,Macroeconomics Chapter 15,23,The Price-Misperceptions Model,Empirical Evidence on the Real Effects of Monetary ShocksA brief overview At this point,the empirical evidence suggests that positive monetary shocks tend to expand the real economy,whereas negative monetary shocks tend to contract the re
22、al economy.However,the evidence is not 100%conclusive,and we surely lack reliable estimates of the strength of this relationship.,Macroeconomics Chapter 15,24,The Price-Misperceptions Model,Real ShocksHow does price misperceptions affect our previous analysis of a shock to the technology level,A.Inc
23、rease in A raises real GDP,Y,but lowers the price level,P,at least if the monetary authority holds constant the nominal quantity of money,M.,Macroeconomics Chapter 15,25,The Price-Misperceptions Model,Real ShocksWe assumed that households had accurate current information about the price level,P.We n
24、ow assume,as in the price-misperceptions model,that the expected price level,Pe,lags behind the actual price level,P.,Macroeconomics Chapter 15,26,The Price-Misperceptions Model,Real ShocksIn a boom,when P declines,Pe decreases by less than P.Hence,P/Pe fallsthat is,workers overestimate P during a b
25、oom.Workers underestimate their real wage rate,w/P:the perceived real wage rate,w/Pe,falls below w/P.Ls,decreases for a given w/P.,Macroeconomics Chapter 15,27,The Price-Misperceptions Model,Macroeconomics Chapter 15,28,The Price-Misperceptions Model,Real Shocks（The summary）Because of price misperce
26、ptions,unanticipated increases in the nominal quantity of money,M,raise real GDP,Y,and labor input,L,in the short run.Since money was neutral in the model without price misperceptions,we can also say that these misperceptions accentuate the real effects of monetary shocks.Price misperceptions lessen
27、 the short-run real effects of real shocks.A favorable shock to the technology level,A,still raises Y and L,but by less than before.,Macroeconomics Chapter 15,29,Rules Versus Discretion,Under a monetary rule,the central bank commits itself to a designated mode of conducting policy.Under discretion,t
28、he authority leaves open the possibility for surprisesthat is,for monetary shocks.,Macroeconomics Chapter 15,30,Rules Versus Discretion,The real economy reacts to a change in the nominal quantity of money,M,only when the change is unanticipatedin particular,only when the money shocks causes the pric
29、e level,P,to deviate from its perceived level,Pe.Consequently,the monetary authority may be motivated to create price surprises as a way to affect real economic activity.,Macroeconomics Chapter 15,31,Rules Versus Discretion,For given inflationary expectations,e,the monetary authority faces a trade-o
30、ff when considering whether to use its policy instruments to raise the inflation rate,.An increase in is beneficial because it raises the inflation surprise,e,and thereby expands real GDP,Y,and labor input,L.,Macroeconomics Chapter 15,32,Rules Versus Discretion,The trade-off between the benefits and
31、 costs of inflation determines the inflation rate,denoted by,that the monetary authority selects.,Macroeconomics Chapter 15,33,Rules Versus Discretion,Macroeconomics Chapter 15,34,Rules Versus Discretion,At*,the policymaker is optimizing for given expectations,and expectations are rational.,Macroeconomics Chapter 15,35,Rules Versus Discretion,Central banks in most advanced economies have become committed to low and stable inflation.This objective is stated in terms of inflation targeting,Macroeconomics Chapter 15,36,
