Money matters because it affects unemployment. Not changes in trend productivity growth or population growth or labor force participation or any number of other variables.

Throughout all of my life, it’s been assumed that monetary shocks drive real output by causing changes in the unemployment rate. Don’t let your policy preferences drive your analysis. (I don’t favor the latter, just saying that’s the proper implication of the misguided worry about Japanese CA surpluses.)Ĩ. You would then weaken the nominal exchange rate by printing money, and strengthen the real exchange rate by reducing Japanese saving rates. Perhaps the nominal exchange rate for the yen is too strong, and the real exchange rate is too weak. These views seem to contradict, but it’s theoretically possible for both to be right. Rather than worry about deflation, they worry that Japan has a current account surplus. Those who think the yen is too weak are using a real framework. Those who say its too strong are using a nominal framework, and are likely worried about deflation. If one set of economists say the Japanese yen is too strong, and another set say it’s too weak, they are probably using different frameworks. The interaction approach works best for real GDP fluctuations in large diversified economies.ħ. The nominal approach works best for high inflation rates and long run inflation. The real approach works best for short run shocks to specific industries such as housing and oil, plus long run growth. The 1974 recession was more “real” than usual. The Great Inflation was mostly nominal, especially in high inflation countries.ĥ. Recessions such as 1893, 1908, 19 were mostly interaction.Ĥ. The 1500 to 1650 inflation was nominal.Ģ. Most business cycles in ancient times were real, with some interaction. For simplicity, I’ll denote these three areas: nominal, real, and interaction:ġ. Talented macroeconomists like Paul Krugman tend to have good instincts as to which real world issues belong in each category. I also believe that understanding the implications of this three part schema makes one a better macroeconomist. (This is how I’d try to explain macro to a really bright person, if I were given only 15 minutes.) If wages and prices are sticky then an increase in the money supply will also cause a temporary rise in employment and real output.Īnd that’s basically all of macro.

The effects are temporary, and go away once wages and prices have adjusted. These changes occur even if there is no fundamental real shock hitting the economy. Thus because prices are sticky, an increase in the money supply will temporarily cause higher real money demand, a lower real interest rate, and a lower real exchange rate. Disequilibrium macro looks at nominal shocks that cause changes in real variables, but only because of wage/price stickiness. These can cause changes in the real demand for money, the real interest rate, the real exchange rate, the unemployment rate, real GDP, and many other real variables.ģ. These include changes in population, technology, capital, preferences, government policies, weather conditions, taxes, etc. Equilibrium real macro can be thought of as looking at economic shocks that do not rely on wage/price stickiness. In all three cases the concept is most useful when the money supply and price level are changing very rapidly, especially if those changes persist for long periods of time.Ģ. The third suggests that a change in the inflation differential between two countries will cause an equal change in the rate of appreciation of the nominal exchange rate.Īll three concepts implicitly hold something constant either the real demand for money, the real interest rate, or the real exchange rate.

The second suggests that a change in inflation will cause an equal change in nominal interest rates. The first suggests that a change in M will cause a proportionate change in P. Within equilibrium nominal there are important concepts: Disequilibrium sticky wage/price (interaction)ġ.

Macro management 4 vision lol