Inflation,Deflation,andthePhillipsCurve-YaleUniversity.pdfVIP

Inflation, Deflation, and the Phillips Curve Inflation Deflation 1 Macroeconomics pre-Halloween i r IS-MP Y πe u Potential pot output = Y AF(K,L) 2 1 Now add inflation as the spook of central bankers i r IS-MP Y πe u Potential pot output = Y AF(K,L) π 3 Final steps toward full short-run model We will develop full AS-AD model as presented in Mankiw Chapter 14. We will develop model on Friday and show its properties. Equations of model: 1. IS Yt = Y* - α (rt –r*) + μG + εt e 2. Cost of capital: rt = it – π t + risk and term premia e 3. Phillips curve: π t = π t + φ(Yt -Y* ) + ξt e 4. Inflation expectations: π t = π t-1 5. Monetary policy (Taylor) i t = πt + θ π (πt - π*) +θY (Yt -Y* ) We did (1) in IS-MP section. We did cost of capital (2) in investment section. We do (3) Phillips curve today (but substitute Y for u). We discuss (4) expectations briefly. We discuss Taylor rule (5) on Friday and in pset. 4 2 Inflation’s history in the US 5 6