Download - Monetarism Notes
Monetarism Notes
Econ 102Mr. Smitka
Winter 2003
Prime Minister Kakuei Tanaka, 1972
田中角栄• 列島改造計画 Plan to Rebuild the Japanese Archipelago
– Slowdown ca. 1970 encouraged fiscal policy– Tanaka started in the construction industry, used tha
t to raise campaign funds for faction / political party
• 1971 ¥/$ appreciation: end of “Bretton Woods”– huge inflow of dollars, bought to lessen forex shift bu
t boosted money supply / lowered interest rates
• Sum: both stimulative MP and stimulative FP– Double-digit inflation by 1973
Oil Crisis
• October 6, 1973 Yom Kippur War– OPEC already more active– Boom not just in Japan but also US, Europe
• I worked overtime, 7 days / week, at UAW wages …• Demand made cartel discipline moot
– Oil prices quadrupled• Japan imported 99+% of oil• Huge boost in inflation
• Inflation jumped to 25%– Panic buying: shoppers trampled to death buying TP
Bank of Japan reaction
April 1973 4.5% --> 5%
May 1973 5.5%
July 1973 6%
August 1973 7%
December 1973 9%
April 1975 Began lowering
Money Supply
0
100,000
200,000
300,000
400,000
500,000
600,000
1969.011969.071970.011970.071971.011971.071972.011972.071973.011973.071974.011974.071975.011975.071976.011976.071977.01
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
M1 Currency Deposits M1 Growth
Money Supply
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
1970.011970.041970.071970.101971.011971.041971.071971.101972.011972.041972.071972.101973.011973.041973.071973.101974.011974.041974.071974.101975.011975.041975.071975.10
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Wholesale Prices, Monthly Rate (Annualized) M1 Growth Wholesale Prices vs Previous Year
Analytic issues
• Time lags– Recognition
– Implementation
– Impact
• Time consistency– Short-run versus long-run
• Structural issues– Institutional change renders historical relationships
(model parameters) misleading
Monetarist models
• MP = ? … what should be goals?• MV PY … an identity: true by definition
– M is money stock– V is velocity, ability of a given amount of
money to support economic activity– P is price level, Y real GDP
• So PY is nominal GDP
• Can this framework be used?
MV PY
• IF velocity “V” is stable• AND the link between nominal and real
GDP is predictable• THEN can tie changes in money supply to
changes in “P” – that is, inflation• But in fact
– V is noisy and shifts with institutional change– PY is not easy to decompose
Sample arithmetic
• MV PY…to use, add growth rates– M plus 5%
• V ±2% since volatile / large error component– Then PY can range from +7% to +3%
• Real Y avg +2% but can fall as much as -1%– [increase can be more short-run, coming out of recession]
– So P can range from:• 7% - (-1%) = 8%• 3% - 2% = 1%
• Monetarist framework offers little insight under “normal” growth rates of US and post-1973 Japan
Sample arithmentic #2
• M = +25%
• V ±2% as before– Then PY can range from 27% to 22%– Even with real Y = +5% inflation is high– But oil crisis ---> Y = -2% [or worse!]
• So inflation 24% ≈ 29%
• High “M” growth is indicative of problems
Other aspects
• FP side effects– Implications of lifetime consumption model
• MP side effects– Do you really want low investment to persis
t?– Are big swings in forex rates desirable?
• International side effects– How to respond to exogenous forex shifts?
Calulation
• Nominal change x = new value is (1 + x) times old
• Ditto inflation π ==> new value is (1 + π) old• Hence the net change is:
1+x = 1 + x - π (+ error term)
1+π• Hence real change ≈ x - π• This approximation is accurate when x & π are
single-digit