MACROECONOMICS
the Phillips curve, the natural rate of unemployment, inflation
WAGE DETERMINATION EQUATION
W, nominal wage
P^e, expected price level
u, unemployment rate
z, a variable which captures other factors that affect wage determination
PRICE DETERMINATION EQUATION
P, price
m, mark up
when both of the above equations are put together or replacing W in the second equation by the
first equation :
• price and wage - when expected price level increases, nominal wage increases, firms
increase prices thus price level increases
• unemployment - when unemployment increase, nominal wage decreases, price decreases
thus price level decrease
parameter α - captures the strength of the effect of
unemployment on the wage
- this equation captures the notion that the ;
higher the u, lower the w, and
higher the z (ex, unemployment benefits), higher the w
replacing the function F, gives
- this gives a relation between the
price level, the expected price level,
unemployment rate
, relation between inflation, expected inflation, unemployment rate
-π , inflation rate
-π^e , expected inflation rate
-(m+z) , m symbolizes goods market and z symbolizes
labour market
- increase in π^e, leads to an increase in π
- given π^e, an increase in m or z, leads to an increase in π
- given π^e, a decrease in u, leads to an increase in π
πt, π^et, ut are with time indexes but m and z are not because we assume it to be constant.
PHILLIPS CURVE
according to Phillips
- there was a negative relation between unemployment rate and inflation rate
- he assumed inflation is not persistent, so inflation this year is not a good predictor of inflation
next year
- so, as for Phillips, expected inflation rate was π (constant) and not π^e
behaviour of inflation changed what Phillips said;
- persistence of inflation - inflation became more persistent
- parameter θ, the effect of last year’s inflation
rate on this year’s expected inflation rate. ( if θ is
higher, higher the π^e )
as θ is increased from 0 to 1
the simple relation (unemployment rate and inflation rate) by phillips disappeared and a new
relation emerged, the unemployment rate and the change in the inflation rate
the Phillips curve, the natural rate of unemployment, inflation
WAGE DETERMINATION EQUATION
W, nominal wage
P^e, expected price level
u, unemployment rate
z, a variable which captures other factors that affect wage determination
PRICE DETERMINATION EQUATION
P, price
m, mark up
when both of the above equations are put together or replacing W in the second equation by the
first equation :
• price and wage - when expected price level increases, nominal wage increases, firms
increase prices thus price level increases
• unemployment - when unemployment increase, nominal wage decreases, price decreases
thus price level decrease
parameter α - captures the strength of the effect of
unemployment on the wage
- this equation captures the notion that the ;
higher the u, lower the w, and
higher the z (ex, unemployment benefits), higher the w
replacing the function F, gives
- this gives a relation between the
price level, the expected price level,
unemployment rate
, relation between inflation, expected inflation, unemployment rate
-π , inflation rate
-π^e , expected inflation rate
-(m+z) , m symbolizes goods market and z symbolizes
labour market
- increase in π^e, leads to an increase in π
- given π^e, an increase in m or z, leads to an increase in π
- given π^e, a decrease in u, leads to an increase in π
πt, π^et, ut are with time indexes but m and z are not because we assume it to be constant.
PHILLIPS CURVE
according to Phillips
- there was a negative relation between unemployment rate and inflation rate
- he assumed inflation is not persistent, so inflation this year is not a good predictor of inflation
next year
- so, as for Phillips, expected inflation rate was π (constant) and not π^e
behaviour of inflation changed what Phillips said;
- persistence of inflation - inflation became more persistent
- parameter θ, the effect of last year’s inflation
rate on this year’s expected inflation rate. ( if θ is
higher, higher the π^e )
as θ is increased from 0 to 1
the simple relation (unemployment rate and inflation rate) by phillips disappeared and a new
relation emerged, the unemployment rate and the change in the inflation rate
