Structured essay plans of past exam inflation bias essay questions. Prepared and used by a first class E&M student to revise for Section B of the Macroeconomics FHS paper.
[Tut] In macro theory what determines the size of the inflation bias? Do models of the inflation bias
provide a useful basis for understanding reforms such as the delegation of monetary policy from the
UK Treasury to the Bank of England in 1997?
Refer to my HT2 tutorial sheet answer
Introduction
o Inflation bias when in equilibrium inflation is higher than π T, due to yT > ye.
First outline model explaining how inflation bias arise
o
Factors that increase inflation bias:
o Factors increasing yT:
political influence on monetary policy (high y as signal for economic competence
to win votes),
unintentional overestimation of ye (Orphanide's account of monetary policy in
1970s where policymakers failed to realise decreased productivity levels
lowered PS curve and ye)
Desire to achieve efficient employment given imperfect labour makrets
[graph] PS-WS and ES-ED graph: show effect of lowered PS, and to show higher
E* given perfect labour markets.
[graph] inflation-output graph with higher y T.
o Factors decreasing α like low trade openness
[graph] inflation-output graph with steeper MR
MR equation:
α and β affect steepness
α from short-run PC:
[reference] Romer 1993 showed greater trade openness, greater α, lower
inflation
o Factors decreasing β:
Extent of policymaker's inflation aversion, influenced by past negative
experiences with high inflation, or from trade openness which creates more
distortionary effects of inflation
o Higher CB impatience δ
[equation]
Policy expansion from A implies one-off gain for infinite sequence of losses
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ib45pointer. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $13.39. You're not tied to anything after your purchase.
