Macroeconomics documents are meant to boost your understanding of the foundations of macroeconomics and how each theory worked in its own time and to foster critical thinking.
Greenwich University
Lecturer: Dr Jeff Powell
BSc Econ
Macroeconomics 1; Recap of last week’s sessions + Aggregate Supply and Demand
27//02/2023
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INTRO
Graph sent round with links at weekend and relates to Simon Lewis blog- Oxford Economics>
- highlights recent report from Resolution Foundation UK .
Article points out that its deceptive to use GDP per capita as indicator of economy
doing well
Graph- Lewis points out that mean household income in UK is similar to France. Looks on
surface that France and UK doing the same but France has higher productivity at 17%. Higher
productivity output per hour.
Study- what does productivity have to do with quality of life and mean household income?Study
disaggregates components of GDP per hour to get to household income graph.
Red bar= workers as share of total population. France -people work less retire earlier and live
longer.
Focusing on mean income is deceptive- only way UK can keep up as much as it is
currently doing is by sacrificing quality of life-> more hours more years and retiring
earlier.
This not sustainable. Depressing for us in long term- we are sacrificing quality of life.
Today:
Finish monetary policy and QE and discuss why it was weak in impact
Then new topic- aggregate demand / supply and inflation-look at how model in principles
format gives us insight into historical eras + impact of different policy options
Follows on from consideration of Keynesian ‘ cross’ theory on expenditure/ output
MONETARY POLICIES IN PRACTICE
Cartoon- governors of Us Federal Reserve- joke relating height of governor of Federal bank that
determine US interest rare.
Graph- Investment rate on horizonal and interest rate on vertical- assumption with 8% interest rate, if
investment falls then we move from that e.g. I zero to I one so investment > leads bank to lower
interest rate so incentivising intended investment
If pessimism too much, not important how much we lower rate but investors may think no
profitability behind the economy, pessimism- where no further reductions in interest can help
What to do?
1
, Greenwich University
Lecturer: Dr Jeff Powell
BSc Econ
Macroeconomics 1; Recap of last week’s sessions + Aggregate Supply and Demand
27//02/2023
Move from manipulating short term interest rate to using QE.Do this through ability of central banks
via state licence to create reserves- purchase long terms bonds from banks and other institutions:
Purpose:
This should leads to more liquidity- hope that this will encourage banks to take more risks
Secondly, this pushes down the long-term interest rate as bonds are long term assets.
Demand drives up the price of long terms bonds central bank will bring down long term
interest rate
This should:
Get banks to lend more, get householders and others to invest in more risky assets, give
private corporations finance through non-banks/ financial intermediaries.
Create a number of channels through which QE was supposed to stimulate the economy when
short term interest rates were at zero
QE
4 rounds of QE- at least one more than other countries
2008-2010 crisis £200,000 bill
2011- Eurozone crisis £375 bill
Aug 2016 Brexit- to try and offset outcomes of Brexit > £435 billion
COVID crisis- £645 ,£745 June 2020 then £895 bill Nov 2020
End of 2021- begun to reverse this, stopped buying bonds :Feb 2022- stops reinvesting
proceeds from maturing bonds and QT-Nov 22, selling bonds,
Committed to £80 Bill by end of 2023 – projected
In middle of QT right now
What will this do to liquidity ?Concern. Dealing with policy tools whose implications we don’t
fully understand.
Why a weaker reaction from QE ?Limited success but less so than anticipated?
Existence of liquidity trap
Situation where int rates so low central bank finds its impossible to reduce
them further . So bank swill introduce credit rationing to ensure own
profitability- and deny loans to some potential borrowers and/ or a demand
from borrowers fails to materialise even at rock bottom rates
Keynes- string comments> re interest rate> lowering interest rates even if
long term interest rates is like pushing on a piece of string.
Hiking interest rates will kill investment at 20% BUT push interest rates
down to zero and no guarantee investment will be stimulated
Problems in banking sector- see extended credit in late nineties and early 2000’s during
bubble period- bad debt- sub prime
Banks used cheap funds of low interest rates to deal with bad credit in the
past- rollover or transfer to other investors
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