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1、ContentsqDD ScheduleqAA ScheduleqTemporary Changes in PoliciesqPermanent Changes in PoliciesqMacroeconomic Policy SCA changesAD changesY changesnew equilibrium.See Figure 3-1-10-1.II. Fiscal PolicyChannel: G (T)AD changesYDD schedule moves; Y changesi changesS changesnew equilibriumSee Figure 3-1-10
2、-2.21SYYeSeAADDFigure 3-1-10-1 Monetary PolicyAA1S1Y1Rise in Ms22SYYeSeAADDFigure 3-1-10-2 Fiscal PolicyDD1S1Y1Expansionary fiscal policy23qTemporary Changes in PoliciesIII. Policies to Maintain Full EmploymentIII.1 Real Shocks: See Figure 3-1-11-1.III.2 Monetary Shocks: See Figure 3-1-11-2.IV. Infl
3、ation Bias 1964) and Marcus Fleming (1962). If price stickiness is introduced, the model is extended to M-F-D model, where “D” refers to the Dornbuschs great contribution in 1976 which we have been quite familiar with.Recall the components of the model in the part of the lecture of “adjustments of b
4、alance of payments”.62II. Assumptions A small open economy model (SOE) Price rigidity (hence aggregate supply curve is horizontal, and there is no difference between real exchange rate and nominal rate) Static expectation Perfect asset substitutability Perfect capital mobilityqM-F Model63qM-F ModelI
5、II. ComponentsIII.1 IS ScheduleY=Y(i, A, SP*/P)III.2 LM ScheduleMd/P=f(Y,i)=Ms/PIII.3 BP ScheduleIn case of static expectations, risk neutrality and perfect capital mobility, i-i*=Etst+1-st=064IV. Fiscal 1964). Review chapter 16 and its appendix I for a comparison of M-F model and DD-AA model.76Cont
6、entsqPolicy Instruments qPolicy ObjectivesqAssignments77qPolicy InstrumentsI. Policy Instruments in an Open EconomyI.1 Aggregate Demand InstrumentsExpenditure changing policy, mainly including fiscal and monetary policiesExpenditure-switching policy, mainly including the exchange rate policy and reg
7、ulationsI.2 Aggregate Supply InstrumentsAlso labeled as structural policy, including industrial policy and technical policy, etc.I.3 Instruments for Financing78II. Principles of Policy AdjustmentsII.1 The Tinbergen Law AssumptionsLinear economic structure, Decision making authorities have an absolut
8、e control over all policy instruments A simple illustrationSuppose there are two policy objectives, T1, and T2, and two instruments, namely I1, and I2. The desired objectives are T1*, and T2*, respectively. Suppose also that objectives are linearly dependent on the instruments, hence,qPolicy Instrum
9、ents79T1=a1I1+a2I2T2=b1I1+b2I2If and only if a1b2a2b1, namely the two instruments are irrelevant, can we solve out the I1 and I2 when the government realized its objective.I1=(b2T1*-a2T2*)/(a1b2-b1a2) I2=(a1T2*-b1T1*)/(a1b2-b1a2)Conclusions: The decision-maker need at least n separate policy instrum
10、ents to realize n independent policy objectives in a linear economic system. qPolicy Instruments80qPolicy Instruments II.2 Principles of Effective Market ClassificationPolicy Instruments (i.e., variables) should be directed at those targets (i.e., markets) on which they have the most direct influenc
11、e (Mundell, 1960).II.3 Policy AssignmentFiscal policy should be assigned to and aimed at internal objectives while monetary policy should be assigned to and aimed at external objectives.81qPolicy ObjectivesI. Internal excessive CA surplusZone 4 Under- employment; excessive CA surplusZone 2 Over-empl
12、oyment; excessive CA deficitZone 3 Under-employment; excessive CA deficitFiscal ease1S86 Expenditure-Changing T12 43SDepreciation that results in internal & external balanceFiscal expansion that results in internal & external balance88qPolicy ObjectivesIII. The External Balance Problem of the U.S.II
13、I.1 Reserve Currency Standard: The Case of Dollar The Mechanics of A Reserve Currency Standard The Inherent AsymmetryIII.2 Triffin Dilemma: Confidence Problem The Dilemma and the SDRs The Bankrupt of the Bretton Woods89qAssignments Read chapter 17 and 18 for more understanding on the evolutions of policy objectives under different international monetary system. Refer to Mundell (1960) for more detailed and strict analyses on theories of effective market classification and policy assignment.90
