Intermediate Macroeconomics Lecture 5 Inflation
Intermediate Macroeconomics Lecture 5 Inflation
Definition Inflation The overall increase in prices Hyperinflation: extraordinary high inflation
Definition Inflation: The overall increase in prices Hyperinflation: extraordinary high inflation
Real vs nominal interest Rate The Fisher equation I=r+T r real interest rate i: nominal interest rate 1: inflation rate Nominal interest rate can change because of the change in the real interest rate or/and the inflation rate
Real v.s. Nominal Interest Rate The Fisher equation r: real interest rate i: nominal interest rate : inflation rate Nominal interest rate can change because of the change in the real interest rate or/and the inflation rate i r = +
Nominal Interest rate The quantity theory the Fisher equation An increase in the rate of money growth of 1% causes a 1% increase in the rate of inflation then a 1% increase in the rate of inflation in turn causes a 1% increase in the nominal interest rate This one-for-one relation between the inflation rate and the nominal interest rate is called the Fisher effect (one-for-one refers to % not its value)
Nominal Interest Rate The quantity theory + the Fisher equation An increase in the rate of money growth of 1% causes a 1% increase in the rate of inflation; then a 1% increase in the rate of inflation in turn causes a 1% increase in the nominal interest rate This one-for-one relation between the inflation rate and the nominal interest rate is called the Fisher effect. (one-for-one refers to %, not its value)
Ex Ante vs. ex post 1=P+Z If there is a rumor that the oil price will go up further due to possible opec limitation of production, what will happen?
Ex Ante v.s. Ex Post e i r = + If there is a rumor that the oil price will go up further due to possible OPEC limitation of production, what will happen?
Demand for money e The cost of holding money 1)Do not earn interest 2)Pay the cost for possible inflation So, the cost of holding money is 7-Tc
Demand for Money The cost of holding money 1) Do not earn interest 2) Pay the cost for possible inflation So, the cost of holding money is e r +
The Demand for Money
The Demand for Money ( , ) M d L i Y P = ( , ) d M L r Ye P = +
How To Stop a Hyperinflation If the quantity theory were completely true ky where > i did not affect money demand stabilize money supple stabilize p
How To Stop a Hyperinflation If the quantity theory were completely true where → i did not affect money demand → stabilize money supple = stabilize P M d kY P = 1 V k =
How To Stop a Hyperinflation However if the fisher effect holds (r+x°) r+r is the cost for holding money )stabilize money supply makes z M p丿 Increases → since m is stable, must be that p↓ → deflation
How To Stop a Hyperinflation However, if the Fisher effect holds is the cost for holding money → stabilize money supply makes → increases → since M is stable, must be that p ↓ → deflation ( , ) d M e L r Y P = + e r + e ↓ d M P
How To Stop a Hyperinflation What is the path to get to the end of hyperinflation without causing deflation P MP End of inflation Time
How To Stop a Hyperinflation What is the path to get to the end of hyperinflation without causing deflation? P i M/P M 0 r End of inflation Time
