宏观经济情况 2021年11月14日
1. 目前国内情况仍然产能过剩，所以依旧是买方市场。国际大宗商品涨价带来的原材料上游成本上涨不能被中下游企业通过提价（终端产品）转移到消费者中，因为涨价就意味着industrial orgnisation原理中丧失市场。所以下游企业只能自己消化上游PPI带来的利润下降。
解决：保供稳价
2. US情况：供给端乏力，cost-pull inflation情况。供给方面消费意愿极低（推断），所以大额G使Aggregate Demand维持，Gov Spending仍为正但减少，可能会使AD减少。最终总供给+总需求双重下降导致经济衰退。中国情况：预期财政政策货币政策目标仍然是拉动经济刺激消费，扩大内需，同时保证出口。出口方面，他国通胀情况使外币升值，增加本国出口额。同时参考中金宏观“紧信用、松货币、宽财政”：紧信用为降低风险，货币+财政（降低T以刺激C+I）支持刺激消费。
13 Nov 2021
To be continued.
1. Consider models including effective labours.
2. For producers (firms). How consumers preference of goods quality could be conveyed to producers. 消费者对质量好与坏的产品的需求倾向如何向生产者传递。
Consider a simplified model.
Firms:
$$ Y_{Good}=A\cdot L_{Good}^{\alpha} $$
$$ Y_{Bad}=A\cdot L_{Bad}^{\alpha} $$
\( s.t. \quad L_{Bad}\leq L_{Good} \)
That means good quality products take more factor inputs to produce.
$$ \pi_{Good}=P_{Good}\cdot Y_{Good}-W\cdot L_{Good} $$
\pi_{Bad}=P_{Bad}\cdot Y_{Bad}-W\cdot L_{Bad}
Consumers:
$$ u(C_{Good},C_{Bad})-v(L) $$
\( s.t. \quad P_{Good}C_{Good}+P_{Bad}C_{Bad}<=WL \) Budget Constraint (Non-negative constraint is ignored just now)
CE
Consumers:
$$\mathcal{L}= v(L) +\lambda (WL-P_{Good}C_{Good}-P_{Bad}C_{Bad}) $$
F.O.C.
$$ u_{C_{Good}}’-\lambda \cdot P_{Good}=0 $$
u_{C_{Bad}}’-\lambda \cdot P_{Bad}=0
$$ -v'(L)+\lambda W=0$$
$$So \frac{u_{C_{Good}}’}{P_{Good}}=\frac{u_{C_{Bad}}’}{P_{Bad}}, and \frac{u_{C_{Good}}’}{u_{C_{Bad}}’}=\frac{P_{Good}}{P_{Bad}}$$
Firms:
F.O.C.
$$ \alpha P_{Good} A L^{\alpha-1}_{Good}-W=0$$
\alpha P_{Bad} A L^{\alpha-1}_{Bad}-W=0
$$ So \frac{P_{Good}}{P_{Bad}}=( \frac{L_{Good}}{L_{Bad}} )^{1-\alpha} $$
Combining consumers and firms euler condition, we get
\frac{u_{C_{Good}}’}{u_{C_{Bad}}’} =( \frac{L_{Good}}{L_{Bad}} )^{1-\alpha}
Problems exist, reconsider it. Intra-temporal model + and intertemporal model in RBC framework.
3. 对于生产者公司模型的研究
Separate firms production \(Y^S=Y^{i}+Y^{-i}\), firms maxi long term total profits
$$ \max_{Y^{i}_t, Cost^{i}_t, Y^{-i}_t, Cost^{-i}_t } \sum_{t=0}^{\infty} \pi_t=A(s_t, m_t)P^{i}_t (Y^{i}_t-Cost^{i}_t)+P^{-i}_t(P^{-i}_t-Cost^{-i}_t) $$
s.t. \(Cost^{i}>Cost^{-i} \forall t \)
, where \(A(\cdot,\cdot)\) is a ratio function of \(s_t\) the market share and \(m_t\) the cross market occupation ratio (跨市场经营指数). Meanwhile, \(m_t\) and \(s_t\) are all functions of \(Y^{i}_t, Cost^{i}_t, Y^{-i}_t, Cost^{-i}_t \).
P.S. consider what is the competitive equilibrium in the long run. At the steady-state condition. VIE application and impacts to cross-market operations such as Tencent Alibaba and Facebook.
4. 消费者传递链条， 生产者->平台->消费者。 考虑情况：上游利润低是因为平台榨干上游利润，最终消费者剩余多，但是生产者剩余极低。导致Aggregate Supply 减少。
Generalise the model. I denote \(c_1, l_1, L_1, y_1\) as the consumption, labour supply and demand, and outputs of relative high-quality goods. Also, denote \(c_2, l_2, L_2, y_2\) as those of relative low-quality goods. Note that the high-low quality stated in this working blog only refers to relative quality.
Consumers maximise their utility function subject to the budget constraint. For a representative consumer, the utility function is,
$$ \max_{c_1, c_2, l_1, l_2} u(c_1,c_2,1-l_1,1-l_2) $$
$$ s.t. \quad (l_1\cdot w_1)^i (l_2 \cdot w_2)^{1-i}\geq P_1 c_1 +P_2 c_2 $$
$$ i\in \{0,1\} $$
The wealth of consumers is in Bernoulli form because we assume each consumer can only provide a unique kind of labour in productions.
Consumers provide labours \(l_1\) or \(l_2\), and consume goods \(c_1\) or \(c_2\).
Firms maximise profits. I simplify the model by considering only labour inputs as the factors input. The model could be further expanded by including capital term and letting the technology term be depending on other factor inputs. E.G. \(F( L, K )\).
$$ \max_{L_1, L_2} \pi = \max_{L_1, L_2} P_1 F(L_1)+P_2 F(L_2) – w_1 L_1 -w_2L_2 $$
Solve the model.
Consumer:
$$ \frac{{\partial} \mathcal{L}}{\partial l_1}: u’_3=i\cdot \lambda (w_1 l_1)^{i-1} (w_2 l_2)^{1-i} $$
$$ \frac{{\partial} \mathcal{L}}{\partial l_2}: u’_4=(1-i)\cdot \lambda (w_1 l_1)^{i} (w_2 l_2)^{-i} $$
$$ \frac{\partial \mathcal{L}}{\partial c_1}: u’_1=\lambda P_1 $$
$$ \frac{\partial \mathcal{L}}{\partial c_2}: u’_2=\lambda P_2 $$
And I can get,
$$ \frac{u’_4}{u’_3}=\frac{1-i}{i}\frac{w_1 l_1}{w_2 l_2} $$
$$ \frac{P_1}{P_2}=\frac{u’_1(c_1)}{u’_2(c_2)} $$
Firms:
$$ \frac{\partial \pi}{\partial l_1}: P_1 F’_{l_1}=w_1 $$
$$ \frac{\partial \pi}{\partial l_1}: P_2 F’_{l_2}=w_2 $$
And get,
$$ \frac{w_1}{w_2}=\frac{P_1 F’_{l_1}}{P_2 F’_{l_2}} $$
My current reviews of how the aggregate demand curve is determined and how is the development of Keynesianism and Monetarism encourage me to get further insights into QTM, which is also one of the oldest and currently surviving economic theory.
Let’s begin the story with Karl Marx who is not the pioneer of QTM but partially believed it. His idea about money is that the amount of money in circulation is determined by the quantity of goods times the prices of goods.
John Maynard Keynes also agreed on part of the QTM, but he held a different opinion about the determinant of the quantity of money. He thought that the amount of money depends on the purchasing power or aggregate demand.
Keynes also thought output and velocity (k) is not stable in the short run. (coincide with his idea of price is super sticky in the very short run)
The Cambridge equation formed as the following,
\( M^d=k \cdot P \cdot Y \)
Alfred Marshall, A.C. Pigou, and John Maynard Keynes assumed that money demand is determined by \(k\), which represents a percentage of money hoarded in hands, times the nominal income \( P\cdot Y\).
P.S. Dr. Rendahl at Cambridge taught that part in S201 Applied Macroeconomics before, but I did not get it when I am as a student. Liquidity traps would be introduced in a later blog.
Friedman held the similar idea with Keynes that the velocity would not fixed in the short run. He also stated that the velocity might not offset the effect of money growth, instead velocity moves in the same direction and reinforece with money growth empircally. For example, when quantity of money increase, the velocity rises as well (p.s. my idea: is that still true during the covid crisis? The U.S. example might not be the case, but needs data to prove).
In summary, Marx, Keynes, and Friedman all agreed with the quantity theory of money, but they have different ideas. Marx emphasised the productions, Keynes the demand and income, and Friedman the supply or quantity of money.
Here are a maths and empircal studies.
\( M\cdot V=P\cdot Y \)
In the long run, velocity and real output are constant, so money supply is positively correlated with the price level. However, in the short run, the output is not fixed, so changes in the money supply would change the real output.
By log transformation,
\( m+v=p+y \)
\( v=p+y-m \)
So the changes in velocity are determined by three parts, inflation, real output growth, and money growth. As shown in the figure below, some emprical data tell that correlation between money growth and inflation (y-axis) is close to one, about 0.82 exactly (as frequency is close to 0, means infinite long time period). Where the frequency (x-axis) means the frequency of periods used into the study. 0.5 frequency means horizon of changes in 2 periods (one period is a quarter as data are quarterly recorded). This study tells that in the long run, inflation is correlated with money growth, but the correlation is not that clear in the short run.
Marx, K., 1911. A contribution to the critique of political economy. CH Kerr.
Wen, Y., 2002. The business cycle effects of Christmas. Journal of Monetary Economics, 49(6), pp.1289-1314.
Wen, Y., 2006. The quantity theory of money. Monetary Trends, (Nov).
Two extremes of economists, one group includes Keynesian economists who think the economy should be managed by intervention, and the other includes such as monetarists who believe the economy could self-adjust to equilibrium itself and do not need interventions.
The interventionists include Karl Marx and John Maynard Keynes. In 1936, Keynes published a book The General Theory of Employment, Interest, and Money. He challenged the classical economists that insisted that the economy would self-correct over time. Instead, Keynes considered that government should intervene in the economy by government spending in the short run. Instead of waiting until the economy is back on the right track, the government should actively stimulate by such as government spending (multiplier effects would result in more output. Marginal Propensity to Consume MPC less than 1 could result in the multiplier effects in IS model).
For example, if consumers spend less (consumption decreases), then the government could increase government spending and increase the money supply to boost the economy in recession. Consider
Critics: Some opposite ideas are there. Government spending may not efficiently increase the economy. For example, as in the Broken Window Fallacy, if a window is broken, then a series of jobs and works are created. The householder spends money to pay the worker who fixes the window. The worker then gets money to spend it…etc. However, those created jobs and works are actually wastes, because the window does not have to be broken to make the series of works happen. The householder can spend money on other things he wants.
Are Government spendings similar to the broken window? Maybe it is not. If government spend for indeed useful things such as public university, national defense, then government spendings do create jobs. However, if gov spends on useless things such as deliberately breaking a window and fixing it, then the economy would be inefficient, through current jobs are created. In the meantime, if the government spends on useful things in the beginning but the sub-things are useless in the following chain, then Broke Window Fallacy comes again.
In addition, if the government needs to borrow money to finance the spending, then crowding out effects also exist that private investment and consumption are crowded out or reduced. Because government borrowings bring fewer loanable funds and higher interest rates. The higher the interest rate, the higher the cost of investment.
In summary, Keynesian thinks the government should react to stimulate the economy in recession, decrease the unemployment rate and increase the growth of the economy by government spending (Expansionary Fiscal Policy). It is generally agreed that the Keynesian idea that an increase in government spending does help to make the economy leave recession in the short run. However, the trade-off is the long-run development, and it cannot be captured in current economic theory. Further studies are needed.
P.S. Gov always prefers Keynesianism in facing depression.
Similar to the new classical, new Keynesian also assume households and firms maximise their own expected utility with rational expectation. The difference is that the new Keynesian assumes also a market failure because markets are not perfectly competitive in price and wage. Thus, prices and wages become “sticky” that fails to adjust with the economic conditions.
The sticky price is one of the reasons that the economy cannot achieve full employment. Therefore, fiscal policy and monetary policy could stabilise the macroeconomy and achieve an efficient macroeconomic outcome.
Coordination Failure is another important new Keynesian concept to explain the recession and unemployment. The invisible hand fails to coordinate the usual, optimal, flow of production and consumption. See further studies.
Labour market failure: Efficiency wages also explain the unemployment condition. That theory aims to explain the long-term effect of previous unemployment on permanent unemployment in the long run. (See E200 notes). Shapiro and Stiglitz (1984) developed the shirking model, and their works contribute to the explanation of the employment rate.
See notes of E200.
Taylor rule describes the relationship between the nominal interest rate (, which is set by CB), and other economic factors. Those factors are inflation, output, economic condition (Taylor, 1993).
$$ i_t=\pi_t+r_t^* + a_{\pi}(\pi_t -pi_t^*)+a_y (y_t-y_t^*) $$
In short, the nominal interest rate is affected by inflation, and how the economy deviates from the target.
Some central figures of the new Keynesian areGregory Mankiw, Stanley Fischer, and Jordi Gali.
Fewer interventionists are groups of economists who believe the government and central bank should not interact with the economy operating. Those economists include such as monetarism and the Austrian School of economics. Monetarism is the economic theory focusing on the money supply and central banking system.
Milton Friedman, a Nobel Prize holder and professor at the University of Chicago, is one of the most famous proponents of monetarism (classicalism). He holds different opinions from Keynes and those Cambridge economists who consider money demand determines the amount of money in the market. Instead, Friedman emphasizes the importance of the money supply from the central bank. (Look at the blog post about the Quantity Theory of Money, QTM.)
(M\cdot V=P\cdoc Y \)
In the long run, if the central bank creates too much money into the economy, then there are too much money and too little supply of goods. Price would increase and so inflation would increase. That would result in inefficient resource allocation because consumers do not know whether the increase in price is from inflation or from goods and services becoming more valuable. Monetarists do not agree to create too high inflation even though it can increase outputs in the short run, because consumers would recognise the increase in the price level in the long run, and then the price level goes high.
monetarists agree 2% to 3% level increase in money supply or inflation is healthy. As central banks always prefer Keynesianism to stimulate economic growth, monetarists use rules to constrain the power of the central bank.
Classical Theory
The classical theory is firstly formed by Adam Smith. The classical idea states that consumers and firms make decisions in the free market to maximise their own benefits, which are utility and profits. The invisible hands would fix the market itself without any interventions.
The base stone of classical theory is “flexible wages” that wages would increase with inflation and decrease with deflation. However, Keynesian economists believe the price is sticky in the short run.
Carl Menger is considered to be the founder of the Austrian School. The Austrian school focuses mainly on people, their incentives and limited knowledge (including legal, social, cultural, political, and economic institutions). How individuals make decisions constitutes Austrian economic thought. Thus, they emphasise the ever-changing and adaptive nature of the economy.
F.A. Hayek was a leading member of the Austrian School of Economics, and he believed that the prosperity of society was driven by creativity, entrepreneurship, and innovation, which were only possible in a society with free markets. The Nobel prize was awarded to him and Gunnar Myrdal in 1974 for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena.
Austrian school emphasises supply and productivity in the recession, while Keynesianism emphasise demand.
Schumpeter became known for his original ideas regarding entrepreneurship and “Creative Destruction”.
The Library of Economics and Liberty immortalizes him thus: “Schumpeter pointed out that entrepreneurs innovate not just by figuring out how to use inventions, but also by introducing new means of production, new products, and new forms of organization. These innovations, he argued, take just as much skill and daring as does the process of invention.”
His work venerated entrepreneurship and innovation, arguing that entrepreneurs improve our lives by developing new, unheard-of industries or improving existing goods and services. This foundation is important to remember, as his work does postulate that capitalism is bound to decay into socialism over time.
Schumpeter’s The Theory of Economic Development describes an evenly rotating economy of a stationary state. Within this imaginary state, there is no room for innovations and innovative activities, because these activities would disturb it, causing it to no longer be a stationary state. Innovation is the solution to this state.
https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19
Joseph Schumpeter: the most important economist you might not know of
Friedrich August Hayek
喵！
The U.S. uses Quantitative Easing to boost economic growth in facing a recession, e.g. 2008 Financial Crisis or the current Covid-19. They apply assets purchasing, include such as treasury and MBS (mostly long-term financial high credit assets), to pour a huge amount of money into the financial market, aiming to boost the demand (aggregate demand) and avoid delation that people hoard money for safety.
We would not consider why the U.S. purchases long-term assets because interest rates either in the long or short term would all go down by non-arbitrage conditions. (P.S. long term T-bond rate was even lower than the short term T-bill rate in the first and second quarter of 2021, the unusual situation would largely during to the inefficient market and incontinence of the long term U.S. economy, but most likely the non-arbitrage would be applied later. So, investment opportunities were to short the long term T-bond, as it was overvalued by QE, and it would be back to a relatively lower price than during that time)
Theoretically, there is an increasing supply of money in the loanable fund market by asset purchasing (QE), because CB would buy bonds and lend money. So, the supply of loanable funds increases (the supply curve moves to the right,), and result in a decrease in interest rate. Then, investment increases due to the low cost of using money (low-interest rate).
Then in the AD-AS market, an increase in investment to drive the AD curve moves to the right as well. Considering now the AS curve is upward sloping in the short run, the movement of the AD curve would indeed increase output, Y, (as the U.S. wants) and also increase the price level. As a result, the price level would increase and inflation appears! With continuous QE, even hyper-inflation would happen!
In addition, the U.S. also conducts helicopter drops that directly give money to individuals to boost consumption (that is another problem and I would discuss in the later blog post)
However, this is not the case in the real world that QE does not create inflation.
One assumption that inflation does not occur is that the economy would be highly deflated if there is no fiscal or monetary policy. The inflation from QE is just offset by the deflation from the “Crisis”.
Whether this assumption is true or not seems unable to be proved. Potential the current heating “Causality” study could help to show that.
Some of my thinking and also perhaps further study are the following.
8 November 2021
FZ
Why does monetary policy work?
$$ \uparrow M \Rightarrow \downarrow i \Rightarrow \uparrow C \uparrow I \Rightarrow \uparrow Y \uparrow Price$$
The monetary market would directly affect the loanable fund market. An increase in the money supply would result in an increase in the money supply, and thus a decrease in interest rate. Later, a lower cost of borrowing and investing would raise the aggregate demand. Therefore, GDP increase.
In addition, with the low-interest rate in the domestic country, the exchange rate goes lower, the domestic currency depreciates relative to the foreign currency. Exports become more competitive.
Through the above two ways, the expansionary monetary policy would decrease unemployment and increase outputs.