slides are here - Stephen Kinsella

INTERNATIONAL MONETARY
ECONOMICS
Spring 2011
Stephen Kinsella | University of Limerick
LECTURE 0
Introduction
MODULE
ORGANISATION
LAST MODULE (EC6012_2010)
National income/product accounting
Cycles & Crises
Models of Cycles, BoP accounting
Money, Inflation, Hyperinflation
Financial fragility/crises
NOT GREAT,
BECAUSE
Too theoretical
Too mathematical
Too ‘topline’, not enough specifics.
Freaked out Global Mngt Students
No TA/Tutorials.
Assessment was Midterm/Final
THIS TIME AROUND
(re)Introduction to macroeconomics
Monetary Economies as starting point
National income and product accounting
Simple macroeconomic modeling
Cycles, Crises, Uncertainty. European/Irish Dimension
TA (Mary Carey)+Tutorials to help with maths, starts week
3.
Assessment: 3 (2* individual, 1* group), Projects, no final
exam.
EMPHASIS ON:
Data + data skills
Macro modeling/interpretation second.
Key Readings in Library also available as ebooks
It is what you read when you don’t have to that
determines what you will be when you can’t help it.
––Oscar Wilde
OTHER ADMIN STUFF
Course page on http://stephenkinsella.net
Code, Datasets, Lecture notes, etc, up there.
My office hours: Wednesday 9-11am. I’m pretty rigid about
that. Email. stephen.kinsella@ul.ie
TA is: Ms. Mary Carey: mary.carey@ul.ie, office hours 10-12
Mondays.
Week
Topic
Reading
1
Introduction: Macro-Finance
Leamer 1
2
NIPA, Effective Demand, HET
GL1, Leamer 2, 3
3
Growth & Development
Leamer, 2
4
EMU, Inflation & unemployment
Leamer, 4
5
Stock Flow Consistent Models of Ex. Rate
6
Recession early warning signs
Leamer 11, 12
7
Irish economy: What just happened?
Kinsella, 3, 4, 5
8
9
10
11
12
Central Banks, Cycles & Crises
No Lecture
Open Economy Macro
New Directions in Monetary Economics
Debt-Deflation Models
Kinsella, 2,3,4
13
Presentations & Projects
GL 3, 4
Leamer 19
GL 6
GL 5, Kinsella
2011
To get a grade in this module you’ll
have to produce:
0. 2 Pager on anything. Due February 4th.
1. Individual Country file. March 11, feedback March 18th
2. Individual Data project, April 8, feedback April 15th
3. Presentations on papers Week 13.
(Peer Review)
You write a project. You submit 2 copies of that project using the
submission template.
PEER REVIEW?
We give each copy to a different classmate. They mark it, according to
the guidelines we give them. They will be fair, and will suggest a grade
that we will approve.
You will be doing the same for some of them. All of this is
anonymous.
You’ll get 30% of your grade for writing your project, and 10% for
commenting on other students’ submissions. You submit the
comments 7 days after you get the paper to read and review.
Organisation is very important here. So: no late entries. Any late entry
loses 99% of their mark. No late submission of anything, for any
reason. Students found plagiarising/communicating regarding their
submissions will be pummeled with bags of unripened Kumquats.
Off we go.
LECTURE 1
WHITHER
MACRO?
3 PARTS TO ECONOMICS
Theory: specifies mechanisms and stories about how the world
worked, & how things might be linked together. (Science view,
See Samuelson, 1971, Velupillai, 2009). Really just stories.
Evidence that could be interpreted in terms of the theory.
(Empirics, See Leamer, 2009). Really just patterns.
Writing that could explain mechanisms in a way that made
them compelling (Rhetoric. See McCloskey, 2006)
PATTERNS & STORIES
Understand the quality of your knowledge
Understand the role your assumptions & definitions play in
forming your thoughts & your models
Quality of your data, precision of your measurement. See
Morgenstern (1945)
Leamer: “We are pattern-seeking, story telling, animals”
Macro: seeks a measurement schema for pattern discovery in
the economy, searches for invariants within that schema.
Epic Failure So Far.
DEMAND, GROWTH,
UNEMPLOYMENT, PRICE
LEVELS, INTEREST RATES
Babies.
BABIES
Babysitting Coop. A group of people agrees to baby-sit for one
another, obviating the need for cash payments to adolescents.
Benefits Obvious.
Coop issued scrip--pieces of paper equivalent to one hour of
baby-sitting time.
Baby sitters would receive the appropriate number of
coupons directly from the baby sittees.
System now self-enforcing: each couple would automatically
do as much baby-sitting as it received in return.
FROM PAUL KRUGMAN, SLATE, 14 AUGUST 1998, HTTP://WWW.SLATE.COM/ID/1937/
BABIES
Problem. During periods when it had few occasions to go out,
a couple would probably try to build up a reserve--then run
that reserve down when the occasions arose.
There would be an averaging out of these demands. One
couple would be going out when another was staying at
home.
But since many couples would be holding reserves of coupons
at any given time, the co-op needed to have a fairly large
amount of scrip in circulation.
Transaction cost problem: can’t collect/process dues fast
enough.
BABIES
Most couples were anxious to add to their reserves by babysitting, reluctant to run them down by going out.
But one couple's decision to go out was another's chance to
baby-sit; so it became difficult to earn coupons.
Knowing this, couples became even more reluctant to use their
reserves except on special occasions, reducing baby-sitting
opportunities still further.
The baby sitting coop had fallen into a recession.
How would you solve this problem?
DEMAND, GROWTH,
UNEMPLOYMENT, PRICE
LEVELS, INTEREST RATES
GROSS DOMESTIC PRODUCT
(GDP)
Sum of all final goods and services produced in the economy
in a given period.
Outcomes, not processes, measured. If it is produced and
sold, it is measured.
Highly imperfect measure of “well being”
Uncorrelated with Happiness (Stiglitz Report, 2009, Oswald,
2008, Inglehart & Klingman, 2008)
Remember: GDP = C+ I + G + X - M
BEWARE: GDP VS GNP
Usually this is a statistical discrepancy: difference btw net factor
income from abroad in GDP. Not so in Ireland, it’s 20%,
because we are a tax haven.
Before getting into discussions of growth, let’s talk about
National Income and Product Accounting.
IRISH CASE
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NATIONAL INCOME & PRODUCT
ACCOUNTS (NIPA)
19th Century: William Petty, Quesnay & later Physiocrats
attempt National Accounts.
Developed by Colin Clark, Keynes, Meade, Kuznets, Godley,
Stone 1930s-1950s.
Represented (roughly) as balance sheets, with the
Income=Output Balance postulated.
Don’t confuse Stocks and Flows.
Keynes: 2+ Sets of Prices: Asset Prices & Goods & Services
prices.
CSO Database Direct
EXAMPLE OF MODERN NIPA
Households
Firms
Assets Liabilities Assets
Money Mortgage Capital
Bonds
s
Equity
Net
Housing Worth
Commercial
Banks
Government
Central Bank
Liabilities Assets Liabilities Assets Liabilities
Loans
“Faith & Bonds
Bonds
Bank
Bonds
Credit”
Reserves Reserves
Equity
(Int’l)
Net
Worth
SPVs
Leveraged Finance
Assets Liabilities Assets Liabilities
Loans
Money Mortgage CDOs
Mortgage Equity
s
s
NAMA’d
Bank
stuff
Reserves
Assets
CDOs
Repos
Taylor, 2010, pg. 135
Liabilities
Loans
Repos
Equity
Rest of World
Assets
Liabilities
Int’l
Reserves
(net
worth
LET’S LOOK AT IRELAND’S NIPA IN
GROWTH RATES
2005
2006
2007
2008
2009
(∆%)
(∆%)
(∆%)
(∆%)
(∆%)
‘05-’09
Av. ∆%
Consumption
6.9
6.7
6.4
-1.5
-7
2.3
Govt Exp
3.9
5.1
6.9
2.2
-4.4
2.7
Investment
14.90
4.6
2.8
-14.3
-31
-4.60
Exports
4.80
4.8
8.2
-0.8
-4.1
2.60
Imports
8.30
6.4
7.8
-2.9
-9.7
2.00
GDP
6.00
5.3
5.6
-3.5
-7.6
1.20
Value, €m
GNP
Value, €m
162,314 177342 189374 179988 159647
6.00
6.5
4.5
-3.5
-10.7
0.60
138,053 154078 162853 154671 131242
Source: Department of Finance, September 2010 Monthly Economic Bulletin.
DEMAND, GROWTH,
UNEMPLOYMENT,
PRICE LEVELS, INTEREST
RATES
UNEMPLOYMENT
Two reasons for concern with unemployment, now close to
14% in Ireland.
Unemployment represents waste. There are resources which
could produce output not employed.
Unemployment is a distribution problem.
The “burden” is not shared equally across the working
population.
u = Unemployment Rate = U/N
U = number unemployed actively seeking work
N =Total Labour Force = U+N
BUSINESS ‘CYCLES’ &
UNEMPLOYMENT
In recessions, unemployment rate increases and price inflation
tends to moderate.
In expansions, unemployment falls as GDP grows.
As the economy nears a peak, price inflation tends to
accelerate.
DEMAND, GROWTH,
UNEMPLOYMENT, PRICE
LEVELS, INTEREST RATES
PRICES
CPI/HICP.
GDP Deflators.
Asset Prices vs Goods & Services Prices.
(Keynes vs. Classicals)
REAL VS NOMINAL GDP
Real: value of output in base year prices (2008 in this case)
Nominal: value of output in current prices.
BRIEF MATHEMATICAL NOTE
Economists love logarithms.
Taking the log of a series
turns everything into a ratio.
Means we can interpret
slopes of lines as growth
rates.
A straight line would be a
constant/potential rate of
growth
REAL GDP IN IRELAND
+/-4%
Log Scale, 1961Q1-2010:Q1
REAL GDP IN IRELAND
Difference btw 1 and 5 is same as 5 and 10.
Straight line represents a constant rate of
growth.
Log Scale, 1961Q1-2010:Q1
Growth ‘corridor’ Ireland should have been
on is +-4 year on year.
Recessions are deviations from this line.
Recoveries are returns to, and movements
above, this line.
US Case: Actual vs. Potential GDP
MACRO TASK #1
Understand why GDP cycles up and down so much.
Very important: when will it turn down? Or up?
What can we do to stop this, or mitigate its effects?
GROWTH RATES
Annualised compound growth rate:
-1+RGDPt/(RGDPt-1)
REAL GDP GROWTH RATES, %
STOCKS & FLOWS, LEVELS AND
RATES
GDP/GNP are flow measures between stocks of output, year
to year.
Unemployment level vs. unemployment rate
Notion of ‘Pass through’ or ‘Momentum’
IMPORTANT MACRO INDICATORS
GDP/GNP (DoF, CSO, Eurostat)
Government deficit/surplus
Unemployment (CSO, Eurostat)
New Business Creation/Old Business Death (CRO, Eurostat)
Private Credit Provision (Central Bank)
Debt Levels/Debt Rates, Individual and National (NTMA,
CSO)
ASSIGNMENT 1
(UNMARKED)
In < 2 pages, tabulate leading macro indicators for Irish, UK,
and EU. Source your findings appropriately.
Provide macro commentary on what you see.
See Leamer, 2009, Chapters 3, 4, 5 for details.
MACRO TASK #2
Monitor the economy through time
Look carefully at deficits and debt-dynamics over time.
Adjust policy parameters to control economy (can this be
done?)
BUT FIRST: HISTORY OF
ECONOMIC THOUGHT
Why is HET important?
Very few new ideas in economics. Mostly repackaged old
ones. Understand old ideas more easily, see flaws/bias/bullshit
in ‘new’ ones.
Policy prescriptions which harm/benefit millions come from
these ideas.
CLASSICAL, KEYNESIAN, MAYNARD’S REVENGE
Classical Economists relied on Says Law: supply creates its own
demand. Any glut will be taken care of by price movements.
Role of policy is to get out of the way of this price correction.
Keynes: aggregate/effective demand must be controlled to
ensure high levels of employment and output.
Keynesian theory elaborated by Minsky/Tobin/Godley, of
whom much more later.
Post 1960s, New Classicals abandoned Effective demand,
exhumed Say’s Law using Rocket Science Maths. Keynes
Buried. Monetarism & Real Business Cycle Theory reign.
2008-2010. Wheel fall off bus. Return of the master.
THE MAN HIMSELF, JB SAY:
“It is worthwhile to remark that a product is no sooner
created than it, from that instant, affords a market for
other products to the full extent of its own value. When
the producer has put the finishing hand to his product,
he is most anxious to sell it immediately, lest its value
should diminish in his hands. Nor is he less anxious to
dispose of the money he may get for it; for the value of
money is also perishable. But the only way of getting rid
of money is in the purchase of some product or other.
Thus the mere circumstance of creation of one product
”
immediately opens a vent for other products.
––(J. B. Say, 1803: pp.138–9)
Price adjustments clear markets eventually, All booms/busts are
cyclical phenomena.
Price Level (P)
Laissez faire policies, free market economics. One sees this clearly
in the textbook AS/AD model.
130
120
110
100
90
80
S
D
E
SAY’S WORLD
D
S
0
5,200
5,600
6,000
6,400
6,800
Real GDP (Y)
UNCERTAINTY
The Years of High Theory.
Keynes
Shackle
Godley & Lavoie
Shafer & Vovk
SUMMARY
This will be an events-focused, practical module that teaches
you a little bit of everything, and gives you ‘hints’ to explore
more.
You have work to do. Off you go.