SEM 2 - LEC 3 - Macro-modelling Non-Vertical Phillips Curve and model comparison Flashcards
whats the ideal model of the Phillips curve
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
explain how the PC is derived from wage inflation and price inflation in a model with imperfect labour/goods markets
show the graphical derivation of the pc
whats the equation for the pc
σ : disutility from work, πE is expected inflation
if you assume adaptive expectations, whats the inertial version of PC
in the pc as disutility from work increases (σ − 1 ↑), what happens
- the steeper the wage setting curve
- the greater real wage rigidity, 1/(σ−1)
- the greater the effect of disequilibrium on inflation
whats nominal rigidity
factors that limit the flexibility of nominal prices e.g. menu costs and staggered contracts
whats real wage rigidity
factors that limit the flexibility of a price relative to another price, e.g. (w/p), (wi/w),(pi/p)
whats the issues with inertial pc
- 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
what happens in case of inflationary shock or announcement of lower inflation target in the pc
- 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
whats the two variants of the pc when we consider ways to model semi-price stickiness and inflation expectations
• “staggered” price adjustment (Calvo) ⇒
New Keynesian Phillips Curve (NKPC)
• “sticky” information (Makiw and Reis) ⇒
Sticky Information Phillips Curve (SIPC)
for the nkpc whats the equation for the overall price level pt
in the nkpc which optimal πt∗ will the δ firms who can reset prices choose?
whats the nkpc equation
whats the difference between new Keynesian Phillips curve and adaptive expectations Phillips curve
what does the long run trade off look like in the nkpc
in the spice whats the equations for firms setting optimal P* and inflation
whats the difference between full information pc and limited information pc equations
whats the equation for the overall inflation in the economy for both FI and LI firms
if LI firms expect the economy to be in equilibrium, whats the sipc equation
what does a change in inflation target under NKPC (Calvo pricing, full information) look like graphically
what does a change in inflation target under SIPC (limited information)
whats the 3 main differences between the NKPC vs AEPC
nkpc vs aepc, responses of inflation to positive output gap (without a policymaker) graphically
what happens to nkpc and apex in response of inflation to negative output gap (e.g. after a crisis)
whats NK DSGE
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)
COMPARE the rbc model, nk dgse model and the 3 equation model
