SEM 2 - LEC 3 - Macro-modelling Non-Vertical Phillips Curve and model comparison Flashcards

1
Q

whats the ideal model of the Phillips curve

A

rational expectations + intertemporally optimising agents + market imperfections + adjustment of wages and prices to disequilibrium
• wage/price stickiness needed for an adverse shock to produce below equilibrium output - even small adjustment costs can produce large macro effects

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2
Q

explain how the PC is derived from wage inflation and price inflation in a model with imperfect labour/goods markets

A
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3
Q

show the graphical derivation of the pc

A
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4
Q

whats the equation for the pc

A

σ : disutility from work, πE is expected inflation

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5
Q

if you assume adaptive expectations, whats the inertial version of PC

A
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6
Q

in the pc as disutility from work increases (σ − 1 ↑), what happens

A
  • the steeper the wage setting curve
  • the greater real wage rigidity, 1/(σ−1)
  • the greater the effect of disequilibrium on inflation
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7
Q

whats nominal rigidity

A

factors that limit the flexibility of nominal prices e.g. menu costs and staggered contracts

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8
Q

whats real wage rigidity

A

factors that limit the flexibility of a price relative to another price, e.g. (w/p), (wi/w),(pi/p)

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9
Q

whats the issues with inertial pc

A
  • microfoundations not discussed nor made explicit
  • lack of forward-looking behaviour by wage and price setters, as E[π] simply past π−1
  • no role for central bank credibility
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10
Q

what happens in case of inflationary shock or announcement of lower inflation target in the pc

A
  • the economy would respond in the same way: CB increases interest rate
  • no forward-looking behaviour ⇒ no role for credibility of monetary policy
  • under CB credibility, announcement of lower target could be met with smaller output loss
  • price and wage setters adjust to the announcement
  • however, need forward-looking price and wage setters
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11
Q

whats the two variants of the pc when we consider ways to model semi-price stickiness and inflation expectations

A

• “staggered” price adjustment (Calvo) ⇒
New Keynesian Phillips Curve (NKPC)
• “sticky” information (Makiw and Reis) ⇒
Sticky Information Phillips Curve (SIPC)

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12
Q

for the nkpc whats the equation for the overall price level pt

A
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13
Q

in the nkpc which optimal πt∗ will the δ firms who can reset prices choose?

A
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14
Q

whats the nkpc equation

A
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15
Q

whats the difference between new Keynesian Phillips curve and adaptive expectations Phillips curve

A
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16
Q

what does the long run trade off look like in the nkpc

A
17
Q

in the spice whats the equations for firms setting optimal P* and inflation

A
18
Q

whats the difference between full information pc and limited information pc equations

A
19
Q

whats the equation for the overall inflation in the economy for both FI and LI firms

A
20
Q

if LI firms expect the economy to be in equilibrium, whats the sipc equation

A
21
Q

what does a change in inflation target under NKPC (Calvo pricing, full information) look like graphically

A
22
Q

what does a change in inflation target under SIPC (limited information)

A
23
Q

whats the 3 main differences between the NKPC vs AEPC

A
24
Q

nkpc vs aepc, responses of inflation to positive output gap (without a policymaker) graphically

A
25
Q

what happens to nkpc and apex in response of inflation to negative output gap (e.g. after a crisis)

A
26
Q

whats NK DSGE

A

NK DSGE is workhorse model for much of modern macroeconomics adopted by central banks around the world before the financial crisis.
• descends from RBC, combining rational expectations with price stickiness
- 3 equations: NKPC, IS (reflecting PIH), MR (reflecting the behaviour of the π-targeting CB)
• MP described by the Taylor rule, where the CB jointly picks π and y (contrasts with the NKPC, where forward-looking price setters respond to an output gap)

27
Q

COMPARE the rbc model, nk dgse model and the 3 equation model

A