1、CHAPTER 17Expectations,Output,and PolicyExpectations,Expectations,Output,and PolicyOutput,and PolicyCHAPTER 17Prepared by:Fernando Quijano and Yvonn QuijanoCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier BlanchardChapter 17:Expectations,Output,and PolicyCo
2、pyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard2 of 2517-1 Expectations and Decisions:Taking StockExpectations,Consumption,and Investment DecisionsExpectations affect consumption and investment decisions,both directly and through asset prices.Expec
3、tations and Spending:The ChannelsFigure 17-1Chapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard3 of 25Note from Figure 17-1:An increase in current and expected future after-tax real labor income,or a decrease
4、in current and expected future real interest rates,increases human wealth and leads to an increase in consumption.An increase in current and expected future real dividends,or a decrease in current and expected future real interest rates,increases stock prices which leads to an increase in nonhuman w
5、ealth and an increase in consumption.17-1 Expectations and Decisions:Taking StockExpectations,Consumption,and Investment DecisionsChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard4 of 25Note from Figure 17-1
6、:A decrease in current and expected future nominal interest rates leads to an increase in bond prices,which leads to an increase in nonhuman wealth and an increase in consumption.An increase in current and expected future real after-tax profits,or a decrease in current and expected future real inter
7、est rates,increases the present value of real after-tax profits,which leads to an increase in investment.17-1 Expectations and Decisions:Taking StockExpectations,Consumption,and Investment DecisionsChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice H
8、all Macroeconomics,5/e Olivier Blanchard5 of 25Consumption and investment depend on expectations of the future.To take into account the effect of expectations,we do the following:Earlier,the IS relation was:A Y T rC YTI Y r(,)()(,)YC YTI Y rG()(,)Define aggregate private spending or simply,private s
9、pending,A,as:Rewrite the IS relation as:(,)YA Y T rG(,),17-1 Expectations and Decisions:Taking StockExpectations and the IS RelationChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard6 of 25GivenYC YTI Y rG()(
10、,)andYA Y T rG(,)(,),and incorporating the role of expectations,then:YA YTrGeee(,)T r Y(,),+,Primes denote future values,and e denotes expected values.Y or Ye A or Tn AeT r or re AThe positive and negative signs explain how:17-1 Expectations and Decisions:Taking StockExpectations and the IS Relation
11、Chapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard7 of 2517-1 Expectations and Decisions:Taking StockExpectations and the IS RelationGiven expectations,a decrease in the real interest rate leads to a small in
12、crease in output:The IS curve is steeply downward sloping.Increases in government spending or in expected future output shift the IS curve to the right.Increases in taxes,in expected future taxes,or in the expected future real interest rate shift the IS curve to the left.The New IS CurveFigure 17-2C
13、hapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard8 of 25The new IS curve is steep,which means that a large decrease in the current interest rate is likely to have only a small effect on equilibrium income,for
14、 two reasons:A decrease in the current real interest rate does not have much effect on spending if future expected rates are not likely to be lower as well.The multiplier is likely to be small.If changes in income are not expected to last,they will have a limited effect on consumption and investment
15、.17-1 Expectations and Decisions:Taking StockExpectations and the IS RelationChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard9 of 25Changes in other than Y and r,shift the IS curve:Changes in T(current taxe
16、s)or G(current government spending)shift the IS curveChanges in expected future variables also shift the IS curve.(,)eeeYA Y T r YT rG(,),+,17-1 Expectations and Decisions:Taking StockExpectations and the IS RelationChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publis
17、hing as Prentice Hall Macroeconomics,5/e Olivier Blanchard10 of 25The LM relation is not modified because the opportunity cost of holding money today depends on the current nominal interest rate,not on the expected nominal interest rate one year from now.MPYL i()The interest rate that enters the LM
18、relation is the current nominal interest rate.17-1 Expectations and Decisions:Taking StockThe LM Relation RevisitedChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard11 of 25the Mission of the FED “The Congres
19、s has entrusted the Federal Reserve with great responsibilities.In every phase of our work and decision making,we consider the well-being of the American people and the prosperity of our nation.”Chair Janet L.Yellen Chapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publis
20、hing as Prentice Hall Macroeconomics,5/e Olivier Blanchard12 of 25When the Fed expanded the money supply,“the”interest rate went down,and spending increased.There are many interest rates,keep these two distinctions in mind:1.The distinction between the nominal interest rate and the real interest rat
21、e.2.The distinction between current and expected future interest rates.17-2 Monetary Policy,Expectations,and OutputChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard13 of 25Decreasing the current nominal inte
22、rest rate i effects the current and expected future real interest rates depending on two factors:Whether the increase in the money supply leads financial markets to revise their expectations of the future nominal interest rate,ie.Whether the increase in the money supply leads financial markets to re
23、vise their expectations of both current and future inflation e and e.17-2 Monetary Policy,Expectations,and OutputFrom the Short Nominal Rate to Current and Expected Real RatesChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e
24、Olivier Blanchard14 of 25ISA Y T r YTrGeee:(,)YLMMPYL r:()17-2 Monetary Policy,Expectations,and OutputFrom the Short Nominal Rate to Current and Expected Real RatesThe IS curve is steeply downward sloping.Other things equal,a change in the current interest rate has a small effect on output.The LM cu
25、rve is upward sloping.The equilibrium is at the intersection of the IS and LM curves.The New ISLMFigure 17-3Chapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard15 of 2517-2 Monetary Policy,Expectations,and Outp
26、utMonetary Policy RevisitedThe effects of monetary policy on output depend very much on whether and how monetary policy affects expectations.The Effects of an Expansionary Monetary PolicyFigure 17-4Chapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice H
27、all Macroeconomics,5/e Olivier Blanchard16 of 25The effects of monetary policy depend crucially on its effect on expectations:If a monetary expansion leads financial investors,firms,and consumers to revise their expectations of future interest rates and output,then the effects of the monetary expans
28、ion on output may be very large.But if expectations remain unchanged,the effects of the monetary expansion on output will be small.17-2 Monetary Policy,Expectations,and OutputMonetary Policy RevisitedPeople form expectations about the future by assessing the likely course of future expected policy a
29、nd then working out the implications of future activity.Economists refer to expectations formed in a forward-looking manner as rational expectationsChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard17 of 25Ra
30、tional ExpectationsUntil the 1970s,macroeconomists thought of expectations as:Animal spirits-the Keynesian treatment of expectations,which considers them important but unexplained.Backward-looking ruleseither static or adaptive expectations.The assumption of rational expectations is one of the most
31、important developments in macroeconomics in the last 25 years.Chapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard18 of 25Recall the conclusions we reached in the core about the effects of a budget deficit redu
32、ction:In the long run,a reduction in the budget deficit is likely to be beneficial for the economy.In the medium run,a lower budget deficit implies higher saving and higher investment.In the long run,higher investment translates into higher capital and thus higher output.In the short run,however,a r
33、eduction in the budget deficit,unless it is offset by a monetary expansion,leads to lower spending and to a contraction in output.17-3 Deficit Reduction,Expectations,and OutputChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e
34、 Olivier Blanchard19 of 25Lets review what we learned about the effects of a deficit reduction in the medium run and the long run:In the medium run,a deficit reduction has no effect on output.It leads,however,to a lower interest rate and to higher investment.In the long run,higher investment leads t
35、o a higher capital stock,and to a higher level of output.17-3 Deficit Reduction,Expectations,and OutputThe Role of Expectations about the FutureChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard20 of 2517-3 D
36、eficit Reduction,Expectations,and OutputBack to the Current PeriodWhen account is taken of its effect on expectations,the decrease in government spending need not lead to a decrease in output.The Effects of a Deficit Reduction on Current OutputFigure 17-5Chapter 17:Expectations,Output,and PolicyCopy
37、right 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard21 of 25Deficit reduction may actually increase spending and output,even in the short run,if people take into account the future beneficial effects of deficit reduction.In response to the announcement of
38、 deficit reduction,Current spending goes downthe IS curve shifts to the left.Expected future output goes upthe IS curve shifts to the right.And the interest rate goes downthe IS curve shifts to the right.17-3 Deficit Reduction,Expectations,and OutputBack to the Current PeriodChapter 17:Expectations,
39、Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard22 of 25Small cuts in government spending and large expected cuts in the future will cause output to increase more in the current perioda concept known as backloading.Backloading,how
40、ever,may lead to a problem with the credibility of the deficit reduction programleaving most of the reduction for the future,not the present.The government must play a delicate balancing act:enough cuts in the current period to show a commitment to deficit reduction and enough cuts left to the futur
41、e to reduce the adverse effects on the economy in the short run.17-3 Deficit Reduction,Expectations,and OutputBack to the Current PeriodChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard23 of 25Can a Budget D
42、eficit Reduction Lead to an Output Expansion?Ireland in the 1980sTable 1Fiscal and Other Macroeconomic Indicators,Ireland,1981 to 1984 and 1986 to 1989198119821983198419861987198819891 Budget deficit(%of GDP)-13.0-13.4-11.4-9.5-10.7-8.6-4.5-1.82 Output growth rate(%)3.32.3-0.24.4-0.44.75.25.83 Unemp
43、loyment rate(%)9.511.013.515.017.116.916.315.14 Household saving rate (%of disposable income)17.919.618.118.415.712.911.012.6Chapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard24 of 25To summarize,the change i
44、n output as a result of deficit reduction depends on:The credibility of the programThe timing of the programThe composition of the programThe state of government finances in the first place.17-3 Deficit Reduction,Expectations,and OutputBack to the Current PeriodChapter 17:Expectations,Output,and PolicyCopyright 2009 Pearson Education,Inc.Publishing as Prentice Hall Macroeconomics,5/e Olivier Blanchard25 of 25Key Terms aggregate private spending,or private spending animal spirits adaptive expectations rational expectations backloading credibility
