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9.A. ARE NOMINAL PRICES/WAGES STICKY? 207 9.A Are Nominal Prices/Wages Sticky? At one level, the answer to this question seems obvious: of course they are. Most people likely have in mind the behavior of their own wage when they answer in this way. Nominal wage rates can often remain fixed for several months on end in some professions. Likewise, the prices of many products appear not to change on a daily or even monthly basis (e.g., newspaper prices, taxi fares, restaurant meals, etc.). As is so often the case, however, first impressions are not always correct; and, if they are, they do not always lead to an obvious conclusion. Let us first consider the evidence on product prices, which is based on the empirical work of Bils and Klenow (2002) and Klenow and Krystov (2003): TABLE 9.1 Duration of Prices by Category of Consumption, 1995—97 Category All Items Goods Services Food Home Furnishing Apparel Transportation Medical Care Entertainment Other Median Duration (months) 4.3 3.2 7.8 3.4 3.5 2.8 1.9 14.9 10.2 6.4 Share of CPI (percent) 71.2 30.4 40.8 17.1 14.9 5.3 15.4 6.2 3.6 7.2 According to Table 9.1, the median duration of price ‘stickiness’ is about 4.3 months across a broad range of product categories. Thus, it does appear to be the case that individual product prices display a form of nominal stickiness. But one should be careful here. Price-stickiness at the individual level need not translate into price-level stickiness (i.e., price-stickiness at the aggregate level). Suppose, for example, that all firms keep their prices fixed for 4 months, but when they do change their prices, they change them significantly. One way for the price-level to display stickiness is if a large number of firms synchronized their price changes (for example, if all firms changed their prices at the same time—once every 4 months). On the other hand, if firms changed their prices in a completely unsychronized way (e.g., if everyday a small number of firms change their prices), then the price-level may actually be flexible, despite any inflexibility at the individual level.9 9This result also requires that firms adopt an optimal state-contigent pricing-rule; see 208 CHAPTER 9. THE NEW-KEYNESIAN VIEW It is probably fair to say, however, that reality lies somewhere between these two extreme cases. If it does, then two other questions immediately present themselves. The first question is where in between these two extremes? Are we talking two, three, or possiblyfour months? Supposethatit is threemonths (i.e., one quarter). If the price-level is sticky for one quarter, then the second question is whether this ‘long enough’ to have any important and lasting macroeconomic implications? As things stand, the jury is still out on this question. If price-level stickiness is an important feature of the economy (and it may very well be), one is left to wonder about the source of price stickiness.10 One popular class of theories postulates the existence of ‘menu costs,’ that make small and frequent price changes suboptimal behavior.11 The idea behind a fixed cost associated with changing prices seems plausible enough. But the theory is not without its problems. in particular, Table 9.1 reveals a great deal of variation in the degree of price-stickiness across product categories. Casual empiricism suggests that this is the case. For example, you may have noticed that the price of gasoline at your local gas station fluctuates on almost a daily basis. At the same time, this same gas retailer keeps the price of motor oil fixed for extended periods of time. Why is it so easy to change the price of gasoline but not motor oil? Does motor oil have a larger menu cost? Much of what I have said above applies to nominal wages as well. While some nominal wages appear to be sticky (e.g., my university salary is adjusted once a year), others appear to be quite flexible. For example, non-union construc-tion workers, who often charge piece rates that adjust quickly to local demand conditions). Furthermore, from Chapter 7 we learned that there are huge flows of workers into and out of employment each month (roughly 5% of the employ-ment stock). It is hard to imagine that negotiated wages remain ‘inflexible’ to macroeconomic conditions at the time new employment relationships are being formed. Given the large number of new relationships that are being formed each month, it is even more difficult to imagine how the average nominal wage can remain ‘sticky’ for any relevant length of time. These challenges to the sticky price/wage hypothesis are the subject of ongoing research. Caplin and Spulber (1987). 10Understanding the forces that give rise to price stickiness is important for designing an appropriate policy response. 11A menu cost refers to a fixed cost; for example, the cost of printing a new menu everyday with only very small price differences. Chapter 10 The Demand for Fiat Money 10.1 Introduction Earlier, we defined money to be any object that circulated widely as a means of payment. We also noted that the vast bulk of an economy’s money supply is created by the private sector (i.e., chartered banks and other intermediaries). The demand-deposit liabilities created by chartered banks are debt-instruments that are, like most private debt instruments, ultimately backed by real assets (e.g., land, capital, etc.). If a chartered bank should fail, for example, your demand-deposit money represents a claim against the bank’s assets. In most modern economies, a smaller, but still important component of the money supply constitutes small-denomination government paper notes called fiat money. Fiat money is defined as an intrinsically useless monetary instru-ment that can be produced at (virtually) zero cost and is unbacked by any real asset. Now, let’s stop and think about this. If fiat money is intrinsically useless, what gives it value? In other words, why is the demand for (fiat) money not equal to zero? You can’t consume it (unlike some commodity monies). It doesn’t represent a legal claim against anything of intrinsic value (unlike private mone-tary instruments). Furthermore, a government can potentially print an infinite supply of fiat money at virtually zero cost of production (there are many histor-ical examples). Explaining why fiat money has value is not as straightforward as one might initially imagine. Both the Quantity Theory and the New-Keynesian model studied above simply assume that fiat money has value (i.e., they simply assume that the demand for fiat money is positive). In this chapter, we develop a theory that 209 210 CHAPTER 10. THE DEMAND FOR FIAT MONEY shows under what circumstances fiat money might have value (without assuming the result). This theory is then applied to several interesting macroeconomic issues. 10.2 A Simple OLG Model The basic setup here was first formulated by Samuelson (1958) in his now fa-mous Overlapping Generations (OLG) model. Consider a world with an infinite number of time-periods, indexed by t = 1,2,3,...,∞. The economy consists of different types of individuals indexed by j = 0,1,2,...∞. In Samuelson’s orig-inal model, these different types are associated with different ‘generations’ of individuals. Each generation (with the exception of the initial generation) was viewed as living for two periods. At each point in time then, the economy was viewed as having a set of ‘young’ and ‘old’ individuals, who may potentially want to trade with each other. As will be shown, however, one need not in-terpret different types literally as ‘generations’ (although, the original labelling turns out to be convenient). Consider a member of generation j = t, for j > 0. This person is assumed to have preferences for two time-dated goods (c1(t),c2(t + 1)), which we can represent with a utility function u(c1(t),c2(t + 1)). You can think of c1 as rep-resenting consumption when ‘young’ and c2 as representing consumption when ‘old.’ There is also an ‘initial old’ generation (j = 0) that ‘lives’ for only one period (at t = 1); this generation has preferences only for c2(1). Each generation has a non-storableendowment(y1(t),0). Thatis, individuals are endowed with output when young, but have no output when old (the initial old have no endowment). Thus, the intergenerational pattern of preferences and endowments can be represented as follows: Time Generation 1 2 3 4 5 → 0 0 1 y1(1) 0 2 y1(2) 0 3 y1(3) 0 ↓ y1(4) 0 Note that instead labelling a type j individual as belonging to a ‘generation,’ one can alternatively view all individuals as living at the same time but with specialized preferences and endowments. For example, a type j = 1 individual is endowed with a time-dated good y1(1). This individual also has preferences for two time-dated goods: y1(1) and y1(2). Clearly, this individual values his own endowment. But he also values a good which he does not have; i.e., y1(2). This latter good is in the hands of individual j = 2. Note that whether individuals lives forever or for only two periods does not matter here. What matters is that 10.2. A SIMPLE OLG MODEL 211 at any given date, there is a complete lack of double coincidence of wants. In particular, note that individual j = 2 does not value anything that individual j = 1 has to offer. This lack of double coincidence holds true at every date (and would continue to hold true if individuals lived arbitrarily long lives). 10.2.1 Pareto Optimal Allocation As in the Wicksellian model studied earlier, this economy features a lack of double coincidence of wants. For example, the initial old generation wants to eat, but has no endowment. The initial young generation has output which the initial old values, but the initial old have nothing to offer in exchange. Likewise, the initial young would like to consume something when they are old. Since output is nonstorable, they can only acquire such output from the second generation. However, the initial young have nothing to offer the second generation of young. In the absence of any trade, each generation must simply consume their endowment; this allocation is called autarky. However, as with the Wicksellian model, this lack of double coincidence does not imply a lack of gains from trade in a collective sense. To see this, let us imagine that all individuals (from all ‘generations’) could get together and agree to cooperate. Equivalently, we can think of what sort of allocation a social planner might choose. In this cooperative, the initial young would make some transfer to the initial old. Thus, the initial old are made better off. But what do the initial young get in return for this sacrifice? What they get in return is a similar transfer when they are old from the new generation of young. If this pattern of exchanges is repeated over time, then each generation is able to smooth their consumption by making the appropriate ‘gift’ to the old. Let me now formalize this idea. Let Nt denote the number of individuals belonging to generation j = t. At any given date t then, we have Nt ‘young’ individuals and Nt−1 ’old’ individuals who are in a position to make some sort of exchange. The total population of traders at date t is therefore given by Nt+Nt−1. We can let this population grow (or shrink) at some exogenous rate n, so that Nt = nNt−1. If n = 1, then the population of traders remains constant over time at 2N. For simplicity, assume that the endowment of goods is the same across generations; i.e., y1(t) = y. Assume that the planner wishes to treat all generations in a symmetric (or ‘fair’) manner. In the present context, this means choosing a consumption allo-cation that does not discriminate on the basis of which generation an individual belongs to; i.e., (c1(t),c2(t + 1)) = (c1,c2). In other words, in a symmetric al-location, every person will consume c1 when young and c2 when old (including the initial old). Thus the planner chooses a consumption allocation to maximize u(c1,c2). At each date t, theplanner is constrained to make theconsumption allocation across young and old individuals by the amount of available resources. Available ... - tailieumienphi.vn
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