MacroEconomics 5th canada edition by blanchard

MACROECONOMICS FIFTH CANADIAN EDI TION OLIVIER BLANCHARD Massachusetts Institute of Technology DAVID JOHNSON Wilfrid Laurier University Toronto À Noelle O.B To Susan D.J Managing Editor: Claudine O’Donnell Senior Marketing Manager: Leigh-Anne Graham Developmental Editor: Paul Donnelly Project Manager: Jessica Hellen Production Services: Rashmi Tickyani, Aptara®, Inc Permissions Project Manager: Joanne Tang Photo Permissions Researcher: Q2a/Bill Smith/Luke Malone Text Permissions Research: Anna Waluk, Electronic Publishing Services Inc Interior Designer: Aptara®, Inc Cover Designer: Suzanne Duda Cover Image: © r-o-x-o-r/Fotolia Credits and acknowledgments of material borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within the text Original edition published by Pearson Education, Inc., Upper Saddle River, New Jersey, USA Copyright © 2013 Pearson Education, Inc This edition is authorized for sale only in Canada If you purchased this book outside the United States or Canada, you should be aware that it has been imported without the approval of the publisher or author Copyright © 2015, 2010, 2007, 2003, 1998 Pearson Canada Inc All rights reserved Manufactured in the United States of America This publication is protected by copyright and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Canada Inc., Permissions Department, 26 Prince Andrew Place, Don Mills, Ontario, M3C 2T8, or fax your request to 416-447-3126, or submit a request to Permissions Requests at www.pearsoncanada.ca 10 [EB] Library and Archives Canada Cataloguing in Publication Blanchard, Olivier (Olivier J.), author Macroeconomics / Olivier Blanchard, David Johnson Fifth Canadian edition Includes index ISBN 978-0-13-216436-8 (bound) Macroeconomics Textbooks I Johnson, David R., 1956-, author II Title HB172.5.B556 2014 339 C2013-904778-6 ISBN 978-0-13-216436-8 A B O U T T H E A U T H O R S Olivier Blanchard Olivier Blanchard is the Robert M Solow Professor of Economics at the Massachusetts Institute of Technology He did his undergraduate work in France and received a Ph.D in economics from MIT in 1977 He taught at Harvard from 1977 to 1982 and has taught at MIT since 1983 He has frequently received the award for best teacher in the department of economics He is currently on leave from MIT and serves as the Chief Economist at the International Monetary Fund He has done research on many macroeconomic issues, including the effects of fiscal policy, the role of expectations, price rigidities, speculative bubbles, unemployment in Western Europe, transition in Eastern Europe, the role of labour market institutions, and the various aspects of the current crisis He has done work for many governments and many international organizations, including the World Bank, the IMF, the OECD, the EU Commission, and the EBRD He has published over 150 articles and edited or written over 20 books, including Lectures on Macroeconomics with Stanley Fischer He is a research associate of the National Bureau of Economic Research, a fellow of the Econometric Society, a member of the American Academy of Arts and Sciences, and a past Vice President of the American Economic Association He currently lives in Washington, D.C with his wife, Noelle He has three daughters: Marie, Serena, and Giulia David Johnson David Johnson is Professor of Economics at Wilfrid Laurier University, and Education Policy Scholar at the C D Howe Institute Professor Johnson’s areas of specialty are macroeconomics, international finance, and, more recently, the economics of education His published work in macroeconomics includes studies of Canada’s international debt, the influence of American interest rates on Canadian interest rates, and the determination of the exchange rate between Canada and the United States His 2005 book Signposts of Success, a comprehensive analysis of elementary school test scores in Ontario, was selected as a finalist in 2006 for both the Donner Prize and the Purvis Prize He has also written extensively on inflation targets as part of monetary policy in Canada and around the world His primary teaching area is macroeconomics He is coauthor with Olivier Blanchard of Macroeconomics the sixth U.S edition Professor Johnson received his undergraduate degree from the University of Toronto, his Master’s degree from the University of Western Ontario, and his Ph.D in 1983 from Harvard University, where Olivier Blanchard served as one of his supervisors He has worked at the Bank of Canada and visited at the National Bureau of Economic Research, Cambridge University, and most recently at the University of California, Santa Barbara as Canada–U.S Fulbright Scholar and Visiting Chair Professor Johnson lives in Waterloo, Ontario, with his wife Susan, who is also an economics professor They have shared the raising of two children, Sarah and Daniel When not studying or teaching economics, David plays Oldtimers’ Hockey and enjoys cross-country skiing in the winter and sculling in the summer For a complete change of pace, Professor Johnson has been heavily involved in the Logos program, an after-school program for children and youth at First Mennonite Church in Kitchener, Ontario B R I E F C O N T E N T S THE CORE: INTRODUCTION Chapter A Tour of the World Chapter A Tour of the Book 19 THE CORE: THE SHORT RUN 39 Technological Progress and Growth 330 Chapter 18 Economic Growth in the Open Economy 353 EXPECTATIONS Chapter The Goods Market 40 Chapter Financial Markets 58 Chapter Goods and Financial Markets: The IS-LM Model 81 Chapter Openness in Goods and Financial Markets 107 Chapter The Goods Market in an Open Economy 125 Chapter Chapter 17 Output, the Interest Rate, and the Exchange Rate 144 THE CORE: THE MEDIUM RUN 163 Chapter The Labour Market 164 Chapter 10 All Markets Together: The AS-AD Model—The Basics 184 Chapter 11 All Markets Together: the AS-AD Model—Liquidity Traps and Supply Shocks 204 Chapter 12 The Phillips Curve, the Natural Rate of Unemployment, and Inflation 229 Chapter 13 Inflation, Economic Growth, and Money Growth 245 Chapter 14 Exchange Rates in the Medium Run: Adjustments, Crises, and Regimes 264 THE CORE: THE LONG RUN 289 Chapter 15 The Facts of Growth 290 Chapter 16 Saving, Capital Accumulation, and Output 307 377 Chapter 19 Expectations: The Basic Tools 378 Chapter 20 Financial Markets and Expectations 399 Chapter 21 Expectations, Consumption, and Investment 429 Chapter 22 Expectations, Output, and Policy 456 BACK TO POLICY 473 Chapter 23 Should Policy Makers Be Restrained? 474 Chapter 24 Monetary Policy: A Summing Up 490 Chapter 25 Fiscal Policy: A Summing Up 515 Chapter 26 Epilogue: The Story of Macroeconomics 547 Appendix An Introduction to Canada’s System of National Accounts A1 Appendix A Math Refresher A6 Appendix An Introduction to Econometrics A10 Appendix Symbols Used in This Book A15 Glossary G1 Index I1 C O N T E N T S Chapter THE CORE: INTRODUCTION Chapter Money Demand and the Interest Rate: The Evidence 61 A Tour of the World 1-1 The World Economic Crisis in 2008 and 2009 1-2 Canada 1-3 The United States 1-4 The Euro Area 4-2 4-3 4-4 A Tour of the Book 19 2-1 Aggregate Output 20 The Other Major Macroeconomic Variables 24 4-5 The Unemployment Rate 24 The Inflation Rate 26 2-3 2-4 Macroeconomic Policy 29 A Road Map 30 A Tour of the Book 31 Appendix: The Construction of Real GDP and Chain-Type Indexes 35 Chapter Investment, Sales, and the Interest Rate 82 The IS Curve 82 Shifts in the IS Curve 85 The Goods Market 40 3-1 The Composition of GDP 41 3-2 The Demand for Goods 42 Consumption (C) 43 Investment (I) 46 Government Spending (G) 3-3 46 The Determination of Equilibrium Output 46 Using Algebra 47 Using a Graph 48 Using Words 50 How Long Does It Take for Output to Adjust? 51 3-4 3-5 Summary 77 Goods and Financial Markets: The IS-LM Model 81 5-1 The Goods Market and the IS Relation 82 THE CORE: THE SHORT RUN 39 Chapter Target Interest Rate Setting by the Central Bank 75 A Target Interest Rate Announcement and the Supply of Money 75 A Target Interest Rate Announcement and Activity in the Market for Central Bank Money* 76 GDP, Value Added, and Income 20 Nominal and Real GDP 22 2-2 The Determination of the Interest Rate: II 68 What Banks Do 68 The Supply and Demand for Central Bank Money 69 Two Alternative Ways of Looking at the Equilibrium 73 Open Market Operations Revisited 74 China 12 Looking Ahead 14 Appendix: Where to Find the Numbers 16 Chapter The Determination of the Interest Rate: I 63 Money Demand, Money Supply, and the Equilibrium Interest Rate 63 Monetary Policy and Open Market Operations 66 How Can European Unemployment Be Reduced? 11 What Has the Euro Done for Its Members? 12 1-5 1-6 Financial Markets 58 4-1 The Demand for Money 59 Investment Equals Saving: An Alternative Way of Thinking about Goods–Market Equilibrium 53 Is Government Omnipotent? A Warning 54 5-2 Financial Markets and the LM Relation 85 Real Money, Real Income, and the Interest Rate 86 The LM Curve 86 Shifts in the LM Curve 88 5-3 The IS-LM Model: Exercises 88 Fiscal Policy, Activity, and the Interest Rate 89 Monetary Policy, Activity, and the Interest Rate 93 5-4 5-5 Using a Policy Mix 95 The LM Relation When the Central Bank Directly Targets the Interest Rate 96 Monetary Policy with an Interest Rate Target 96 Fiscal Policy with an Interest Rate Target 97 5-6 Chapter Does the IS-LM Model Actually Capture What Happens in the Economy? 101 8-4 The Effects of Fiscal Policy in an Open Economy 152 The Effects of Monetary Policy in an Open Economy 153 Openness in Goods and Financial Markets 107 6-1 Openness in Goods Markets 108 8-5 Openness in Financial Markets 115 Appendix: Fixed Exchange Rates, Interest Rates, and Capital Mobility 161 The Balance of Payments 116 The Choice between Domestic and Foreign Assets 118 6-3 Chapter Conclusions and a Look Ahead 121 The Goods Market in an Open Economy 125 7-1 The IS Relation in the Open Economy 126 The Demand for Domestic Goods 126 The Determinants of the Demand for Domestic Goods 126 7-2 7-3 Equilibrium Output and the Trade Balance 129 Increases in Demand, Domestic or Foreign 130 Increases in Domestic Demand 130 Increases in Foreign Demand 130 Games that Countries Play 132 7-4 THE CORE: THE MEDIUM RUN Chapter The Large Flows of Workers 165 Differences across Workers 167 9-2 9-3 Appendix: Derivation of the Marshall– Lerner Condition 143 Chapter Output, the Interest Rate, and the Exchange Rate 144 8-1 Equilibrium in the Goods Market 145 8-2 Equilibrium in Financial Markets 146 Money versus Bonds 146 Domestic Bonds versus Foreign Bonds 146 8-3 vi CONTENTS Putting Goods and Financial Markets Together 150 Movements in Unemployment 168 Wage Determination 171 Bargaining 171 Efficiency Wages 172 Wages and Unemployment 173 9-4 9-5 Depreciation, the Trade Balance, and Output 135 Looking at Dynamics: The J-Curve 138 163 The Labour Market 164 9-1 A Tour of the Labour Market 165 Price Determination 174 The Natural Rate of Unemployment 175 The Wage-Setting Relation 175 The Price-Setting Relation 175 Equilibrium Real Wages and Unemployment 176 From Unemployment to Employment 178 From Employment to Output 179 Depreciation and the Trade Balance: The Marshall–Lerner Condition 136 The Effects of a Depreciation 136 Combining Exchange-Rate and Fiscal Policies 137 7-5 Fixed Exchange Rates 155 Pegs, Crawling Pegs, Bands, the EMS, and the Euro 155 Pegging the Exchange Rate and Monetary Control 156 Fiscal Policy under Fixed Exchange Rates 157 The Choice between Domestic and Foreign Goods 109 Nominal Exchange Rates 109 Real Exchange Rates 111 6-2 The Effects of Policy in an Open Economy 152 9-6 Where Do We Go from Here? 179 Appendix: Wage- and Price-Setting Relations versus Labour Supply and Labour Demand 182 Chapter 10 All Markets Together: The AS-AD Model—The Basics 184 10-1 Aggregate Supply 185 The Derivation of the Aggregate Supply Relation 185 10-2 Aggregate Demand 187 10-3 Equilibrium Output in the Short Run and the Medium Run 189 The Dynamics of Output and the Price Level 190 10-4 The Effects of a Monetary Expansion 193 The Dynamics of Adjustment 193 Looking Behind the Scene 193 The Neutrality of Money 195 10-5 A Decrease in the Budget Deficit 197 The Budget Deficit, Output, and the Interest Rate 197 10-6 Conclusions 199 The Short Run versus the Medium Run 199 Shocks and Propagation Mechanisms 199 First Observations on Policy and the Business Cycle in the AS-AD Model 199 Chapter 11 All Markets Together: the AS-AD Model— Liquidity Traps and Supply Shocks 204 11-1 The Liquidity Trap and the Risk of Deflation 205 The Limits of Monetary Policy: The Liquidity Trap 205 The Risk of Deflation 208 11-2 The Most Recent Liquidity Trap: The United States in 2009 209 Housing Prices and Subprime Mortgages 211 The Role of Banks 212 Leverage 213 Complexity 214 Liquidity 215 Amplification Mechanisms 215 11-3 Policy Choices in a Liquidity Trap and a Banking Collapse 217 Fiscal Policy as the Way Out of the Liquidity Trap 217 Examples of Fiscal Policy in the Liquidity Trap 217 The Limits of Fiscal Policy: High Debt 218 Policies in a Banking Crisis 220 11-4 Supply Shocks: An Increase in the Price of Oil 220 Effects on the Natural Rate of Unemployment 222 The Dynamics of Adjustment 222 11-5 Conclusions 224 Chapter 12 The Phillips Curve, the Natural Rate of Unemployment, and Inflation 229 12-1 Inflation, Expected Inflation, and Unemployment 230 12-2 The Phillips Curve 231 The Early Incarnation 231 Mutations 232 Back to the Natural Rate of Unemployment 235 12-3 The Natural Rate of Unemployment, Money Growth, and Inflation 236 12-4 A Summary and Many Warnings 237 The Inflation Process and the Phillips Curve 237 Deflation and the Phillips Curve Relation 238 Differences in the Natural Rate between Canada and the United States 239 Variations in the Natural Rate Over Time 239 The Limits of Our Understanding 241 Appendix: From the Aggregate Supply Relation to the Phillips Curve 244 Chapter 13 Inflation, Economic Growth, and Money Growth 245 13-1 Output, Unemployment, and Inflation 246 Okun’s Law: Output Growth and Changes in Unemployment 246 The Phillips Curve: Unemployment and the Change in Inflation 249 The Aggregate Demand Relation: Money Growth, Inflation, and Output Growth 249 13-2 The Medium Run 250 13-3 Disinflation: A First Pass 252 How Much Unemployment? And for How Long? 252 Working Out the Required Path of Money Growth 253 13-4 Expectations, Credibility, and Nominal Contracts 256 Expectations and Credibility: The Lucas Critique 256 Nominal Rigidities and Contracts 257 13-5 The Canadian Disinflation, 1988 to 1993 258 Chapter 14 Exchange Rates in the Medium Run: Adjustments, Crises, and Regimes 264 14-1 Flexible Exchange Rates and the Adjustment of the Nominal Exchange Rate in the Medium Run 265 Aggregate Supply 266 Aggregate Demand 267 A Full Employment Open Economy with Positive Inflation in the Medium Run 268 Conclusions 271 14-2 Fixed Exchange Rates and the Adjustment of the Real Exchange Rate 271 CONTENTS vii Aggregate Demand under Fixed Exchange Rates 272 Aggregate Demand and Aggregate Supply 273 14-3 Exchange Rate Crises 277 Crises in the European Monetary System 278 14-4 Choosing between Exchange Rate Regimes 280 The Problems of Flexible Exchange Rates 281 The Limited Costs of Fixed Exchange Rates 281 The Benefits of Fixed Exchange Rates 282 THE CORE: THE LONG RUN 289 Chapter 15 The Facts of Growth 290 15-1 Growth in Rich Countries since 1950 291 15-2 A Broader Look across Time and Space 295 Looking at Growth across Two Millennia 295 Looking at Growth across Many Countries 297 Looking at Growth across Canadian Provinces 299 15-3 Thinking about Growth: A Primer 300 The Aggregate Production Function 300 The Sources of Growth 302 Chapter 16 Saving, Capital Accumulation, and Output 307 16-1 Interactions between Output and Capital 308 The Effects of Capital on Output 308 The Effects of Output on Capital Accumulation 309 16-2 Implications of Alternative Saving Rates 310 Dynamics of Capital and Output 310 Steady-State Capital and Output 312 The Saving Rate and Output 313 The Saving Rate and the Golden Rule 316 16-3 Getting a Sense of Magnitudes 317 The Effects of the Saving Rate on Steady-State Output 320 The Dynamic Effects of an Increase in the Saving Rate 320 The Golden Rule 322 16-4 Physical versus Human Capital 323 Extending the Production Function 323 Human Capital, Physical Capital, and Output 324 Endogenous Growth 325 viii CONTENTS Appendix: The Cobb–Douglas Production Function and the Steady State 328 Chapter 17 Technological Progress and Growth 330 17-1 Technological Progress and the Rate of Growth 331 Technological Progress and the Production Function 331 Interactions between Output and Capital 333 Dynamics of Capital and Output 334 The Effects of the Saving Rate 336 17-2 The Determinants of Technological Progress 337 The Fertility of the Research Process 338 The Appropriability of Research Results 339 17-3 The Facts of Growth Revisited 340 Capital Accumulation versus Technological Progress in Rich Countries since 1950 340 Capital Accumulation versus Technological Progress in China since 1980 341 17-4 Institutions and Growth 345 17-5 Epilogue: The Secrets of Growth 347 Appendix: Constructing a Measure of Technological Progress 351 Chapter 18 Economic Growth in the Open Economy 353 18-1 Growth in the Labour Input to Production in Canada 354 The Ratio of Employment to Population and Average Hours of Work 354 Natural Population Growth 355 Immigration and Emigration in Canada 356 18-2 Equipping Workers with Capital in an Open Economy 359 A Closed Economy Review 359 Consumption and Investment Choices in an Open Economy 360 The Accumulation of Foreign Debts in an Open Economy 360 Canada’s International Portfolio 362 When Is International Debt Good for an Economy? 364 18-3 The Import and Export of Technology 366 The Flows 366 Policy Implications of the Transfer of Technology 367 18-4 Growth in the Open Economy: A Summary 368 Appendix: The Optimal Amount of Foreign Borrowing 370 EXPECTATIONS 377 Chapter 19 Expectations: The Basic Tools 378 19-1 Nominal versus Real Interest Rates 379 Computing the Real Interest Rate 379 Nominal and Real Interest Rates in Canada since 1975 381 19-2 Expected Present Discounted Values 383 Computing Expected Present Discounted Values 383 Using Present Values: Examples 385 Nominal versus Real Interest Rates, and Present Values 387 19-3 Nominal and Real Interest Rates, and the IS-LM Model 387 19-4 Money Growth, Inflation, and Nominal and Real Interest Rates 388 Nominal and Real Interest Rates in the Short Run 389 Nominal and Real Interest Rates in the Medium Run 391 From the Short Run to the Medium Run 392 Evidence on the Fisher Hypothesis 393 Appendix: Deriving the Expected Present Discounted Value Using Real or Nominal Interest Rates 397 Chapter 20 Financial Markets and Expectations 399 20-1 Bond Prices and the Yield Curve 400 Bond Prices as Present Values 400 Arbitrage and Bond Prices 402 From Bond Prices to Bond Yields 403 The Yield Curve and Economic Activity 404 20-2 The Stock Market and Movements in Stock Prices 407 Stock Prices as Present Values 408 The Stock Market and Economic Activity 409 20-3 Bubbles, Fads, and Stock Prices 412 20-4 Residential Housing Markets in North America, 1987–2012 414 20-5 Exchange Rate Movements and Expectations 416 Real Interest Rates and the Real Exchange Rate 416 Long-Term Real Interest Rates and the Real Exchange Rate 418 The Real Exchange Rate, Trade, and Interest Rate Differentials 419 The Canadian Dollar from 1998 to 2012 420 Monetary Policy, Interest Rates, and Exchange Rates 421 Policy and Expectations 423 Appendix A: Arbitrage and Stock Prices 426 Appendix B: The Real Exchange Rate, and Domestic and Foreign Real Interest Rates 427 Chapter 21 Expectations, Consumption, and Investment 429 21-1 Consumption 430 The Very Foresighted Consumer 430 An Example 431 Toward a More Realistic Description 432 Putting Things Together: Current Income, Expectations, and Consumption 435 21-2 Investment 435 Investment and Expectations of Profit 435 A Convenient Special Case 437 Current versus Expected Profits 439 Profit and Sales 440 21-3 Investment Spending on New Houses 442 21-4 The Volatility of Consumption and Investment 443 Appendix A: Using Graphs to Illustrate Consumption Decisions When Expectations Are Important 448 Appendix B: Derivation of the Expected Present Value of Profits When Future Profits and Interest Rates Are Expected to Be the Same as Today 455 Chapter 22 Expectations, Output, and Policy 456 22-1 Expectations and Decisions: Taking Stock 457 Expectations and the IS Relation 457 The LM Relation Revisited 459 22-2 Monetary Policy, Expectations, and Output 460 22-3 Deficit Reduction, Expectations, and Output 462 The Role of Expectations about the Future 465 Back to the Current Period 466 BACK TO POLICY 473 Chapter 23 Should Policy Makers Be Restrained? 474 23-1 Uncertainty and Policy 475 How Much Do Macroeconomists Actually Know? 475 Should Uncertainty Lead Policy Makers to Do Less? 476 CONTENTS ix www.downloadslide.net general equilibrium A situation in which there is equilibrium in all markets (goods, financial, and labour) general government A term for the government sector that includes all levels of government: federal, provincial, and local general government’s final consumption expenditure Consumption expenditure on goods and services by all levels of government general government’s gross fixed capital formation Expenditure on capital goods by all levels of government geometric series A mathematical sequence in which the ratio of one term to the preceding term remains the same A sequence of the form ϩ c ϩ c ϩ … ϩ c n gold standard A system in which a country fixed the price of its currency in terms of gold and stood ready to exchange gold for currency at the stated parity golden-rule level of capital The level of capital at which long-run consumption is maximized government bond A bond issued by a government or a government agency government budget constraint The budget constraint faced by the government The constraint implies that an excess of spending over revenues must be financed by borrowing, and thus leads to an increase in debt government spending (G) The sum of general government’s final consumption expenditure and general government’s gross fixed capital formation government transfers Payments made by the government to individuals that are not in exchange for goods or services Example: Canada Pension Plan payments or welfare payments Great Depression The severe worldwide depression of the 1930s gross domestic product (GDP) A measure of aggregate output in the national income accounts (The market value of the goods and services produced by labour and property located in Canada.) gross mixed income Total incomes generated in the unincorporated business sector gross national product (GNP) Income accruing to factors of production, both labour and capital, owned by Canadian residents gross operating surplus The sum of incomes accruing to capital in the corporate, government, and non-profit sectors growth The steady increase in aggregate output over time Guaranteed Income Supplement (GIS) This is a major federal government program of transfers to the elderly who are also poor and have no other support Your income must fall below a certain threshold to receive the GIS haircut The loss on the value of debt experienced by the owner of the debt as a result of debt rescheduling or debt restructuring hedonic pricing An approach to calculating real GDP that treats goods as providing a collection of characteristics, each with an implicit price high-powered money See central bank money hires Workers newly employed by firms household final consumption expenditure and services purchased by consumers G4 GLOSSARY Goods housing wealth The value of the housing stock human capital The set of skills possessed by the workers in an economy intercept In a linear relation between two variables, the value of the first variable when the second variable is equal to zero human wealth wealth The labour-income component of interest parity condition parity relation hyperinflation Very high inflation intermediate good A good used in the production of a final good identification problem In econometrics, the problem of finding whether correlation between variables X and Y indicates a causal relation from X to Y, or from Y to X, or both This problem is solved by finding exogenous variables, called instruments, that affect X and not affect Y directly, or affect Y and not affect X directly identity An equation that holds by definition, denoted by the sign K illiquidity A situation in which financial markets not allow the sale of securities that are usually liquid, that is, easily sold for cash Immigration number of people permanently moving to Canada from other countries imports (Q) The purchases of foreign goods and services by domestic consumers, firms, and the government income The flow of revenue from work, rental income, interest, and dividends independent variable A variable that is taken as given in a relation or in a model See uncovered interest International Monetary Fund (IMF) The principal international economic organization Publishes World Economic Outlook annually and International Financial Statistics (IFS) monthly inventory investment ( I S ) The difference between production and sales investment (I) Purchases of new houses and apartments by people, and purchases of new capital goods (machines and plants) by firms and the non-profit sector investment in inventories The difference between production and sales investment income In the current account, income received by domestic residents from their holdings of foreign assets IS curve A downward-sloping curve relating output to the interest rate The curve corresponding to the IS relation, the equilibrium condition for the goods market index number A number, such as the GDP deflator, that has no natural level and is thus set to equal some value (typically or 100) in a given period IS relation An equilibrium condition stating that the demand for goods must be equal to the supply of goods, or equivalently that investment must be equal to saving The equilibrium condition for the goods market indexed bond A bond that promises payments adjusted for inflation These are also called real return bonds J-curve A curve depicting the initial deterioration in the trade balance caused by a real depreciation, followed by an improvement in the trade balance indirect taxes Taxes on goods and services, primarily sales taxes junior securities Securities that, if bankruptcy of the issuer occurs, are paid after senior securities Industrial policy a term used to describes government policies, tax reductions, subsidies to direct government investment in a specific sector of the economy to encourage growth junk bond inflation prices A sustained rise in the general level of A bond with a high risk of default Keynesians Term used in a variety of ways intended to convey that the person or persons discussed places particular emphasis on the macroeconomic framework proposed by John Maynard Keynes inflation rate The rate at which the price level increases over time labour force The sum of those employed and those unemployed inflation targeting The conduct of monetary policy so as to achieve a given inflation rate over time Labour Force Survey (LFS) A large monthly survey of Canadian households used in particular to compute the unemployment rate inflation targets If a central bank uses inflation targets it sets a public target, usually a band, for the desired rate of inflation In Canada, the inflation target is to 3% labour hoarding The practice of retaining workers during a period of low product demand rather than laying them off inflation tax The product of the rate of inflation and real money balances labour in efficiency units See effective labour labour productivity The ratio of output to the number of workers inflation-adjusted deficit The correct economic measure of the budget deficit: the sum of the primary deficit and real interest payments layoffs Workers who lose their jobs either temporarily or permanently Infrastructure A term referring to capital owned by the government leverage ratio Ratio of the assets of the bank to its capital (the inverse of the capital ratio) instrumental variable methods In econometrics, methods of estimation that use instruments to estimate causal relations between different variables Libor rate Rate at which banks lend to each other instruments In econometrics, the exogenous variables that allow the identification problem to be solved intellectual property products Investment spending to develop intellectual property; also called research and development spending life cycle theory of consumption The theory of consumption, developed initially by Franco Modigliani, that emphasizes that the planning horizon of consumers is their lifetimes linear relation A relation between two variables such that a one-unit increase in one variable always leads to an increase of n units in the other variable www.downloadslide.net liquid An asset is “liquid” when it can be sold for cash quickly and without significant transactions costs Thus, a Treasury bill is very liquid A house is not a liquid asset: Although it can be converted into cash, it may take some time and involve large transactions costs Assets vary in their liquidity Marshall–Lerner condition The condition under which a real depreciation leads to an increase in net exports Mundell–Fleming model A model of simultaneous equilibrium in both goods and financial markets for an open economy maturity The length of time over which a financial asset (typically a bond) promises to make payments to the holder liquid asset An asset that can be sold easily and at little cost medium run A period of time between the short run and the long run national income and expenditure accounts The system of accounts used to describe the evolution of the sum, the composition, and the distribution of aggregate output liquidity facilities A mechanism set up in the 2008 crisis to allow commercial banks to borrow directly from the central bank—often with a lower quality of collateral than previously required for such loans medium-term bond to 10 years liquidity preference The term introduced by Keynes to denote the demand for money liquidity trap The case where nominal interest rates are close to zero, and monetary policy cannot therefore decrease them further LM curve An upward-sloping curve relating the interest rate to output The curve corresponding to the LM relation, the equilibrium condition for financial markets LM relation An equilibrium condition stating that the demand for money must be equal to the supply of money The equilibrium condition for financial markets loan-to-value (LTV) ratio The size of a loan on a house relative to the value of the house logarithmic scale A scale in which the same proportional increase represents the same distance on the scale so that a variable that grows at a constant rate is represented by a straight line long run decades A period of time extending over long-term bond or more A bond with maturity of 10 years Lucas critique The proposition, put forth by Robert Lucas, that existing relations between economic variables may change when policy changes An example is the apparent trade-off between inflation and unemployment, which may disappear if policy makers try to exploit it M1 The sum of currency, traveller’s cheques, and chequable deposits—assets that can be used directly in transactions Also called narrow money and denoted M1ϩ or M1ϩ(gross) M2 M1 plus money market mutual fund shares, money market and savings deposits, and time deposits Also called broad money, sometimes denoted M2ϩ or M2ϩ(gross) Maastricht treaty A treaty signed in 1991 that defined the steps involved in the transition to a common currency for the European Union machinery and equipment Investment in new machinery and equipment by the incorporated business sector macro-prudential tools A set of regulations imposed on the commercial banking sector intended to help stabilize the macroeconomy A bond with maturity of one menu cost The cost of changing a price merchandise trade goods Exports and imports of microeconomics The study of production and prices in specific markets models of endogenous growth Models in which accumulation of physical and human capital can sustain growth even in the absence of technological progress modified Phillips curve The curve that plots the change in the inflation rate against the unemployment rate Also called an expectations– augmented Phillips curve or an accelerationist Phillips curve natural level of employment The level of employment that prevails when unemployment is equal to its natural rate natural level of output The level of production that prevails when employment is equal to its natural level natural population growth The excess of births over deaths in a given period of time natural rate of unemployment The unemployment rate at which price and wage decisions are consistent neoclassical synthesis A consensus in macroeconomics, developed in the early 1950s, based on an integration of Keynes’s ideas and the ideas of earlier economists monetarism, monetarists A group of economists in the 1960s, led by Milton Friedman, who argued that monetary policy had powerful effects on activity net capital flows Capital flows from the rest of the world to the domestic economy minus capital flows to the rest of the world from the domestic economy monetary aggregate The market value of a sum of liquid assets M1 is a monetary aggregate that includes only the most liquid assets net exports (X ؊ Q) The difference between exports and imports Also called the trade balance monetary base See central bank money net immigration Immigration minus emigration in a given period of time monetary contraction A change in monetary policy that leads to an increase in the interest rate Also called monetary tightening net international investment position A measure of Canada’s net foreign assets or debts monetary expansion A change in monetary policy that leads to a decrease in the interest rate monetary–fiscal policy mix The combination of monetary and fiscal policies in effect at a given time monetary tightening See monetary contraction money Those financial assets that can be used directly to buy goods money growth rate money stock The rate of growth of the money market funds Financial institutions that receive funds from people and use them to buy short-term bonds money multiplier The increase in the money supply resulting from a one-dollar increase in central bank money mortgage-backed security (MBS) A security (or bond) issued on which the interest to be paid is derived from a group of pooled mortgages mortgage lender Any financial institution that lends money as a mortgage; a loan for which property is the collateral marginal propensity to import The effect on imports from an additional dollar in income multilateral real exchange rate The real exchange rate between a country and its trading partners, computed as a weighted average of bilateral real exchange rates Also called the trade-weighted real exchange rate or effective real exchange rate or the multilateral exchange rate market for overnight funds This is the financial market in which banks and other financial institutions lend money to each other for one day “overnight.” multiplier The ratio of the change in an endogenous variable to the change in an exogenous variable (for example, the ratio of the change in output to a change in autonomous spending) macroeconomics The study of aggregate economic variables, such as production for the economy as a whole, or the average price of goods natural experiment A real-world event that can be used to test an economic theory net investment income Receipts of factor income from abroad minus payments of factor income to nonresidents This item measures service payments or Canada’s net foreign debts net mixed income Total incomes earned by the unincorporated business sector after subtracting capital consumption allowances accruing to capital owned by that sector net operating surplus: corporations Total profits earned by the incorporated business sector after subtracting capital consumption allowances accruing to capital owned by that sector net transfers paid In the current account, the value of transfers to other countries paid less the value of transfers received from other countries neutrality of money The proposition that an increase in nominal money has no effect on output or the interest rate but is reflected entirely in a proportional increase in the price level new classicals A group of economists who interpret fluctuations as the effects of shocks in competitive markets with fully flexible prices and wages new growth theory Recent developments in growth theory that explore the determinants of technological progress and the role of increasing returns to scale in growth new Keynesians A group of economists who believe in the importance of nominal rigidities in fluctuations, and are exploring the role of market imperfections in explaining fluctuations Nikkei index An index of the nominal value of stocks in Japan GLOSSARY G5 www.downloadslide.net nominal exchange rate The price of foreign currency in terms of domestic currency The number of units of domestic currency you can get for one unit of foreign currency nominal GDP The sum of the quantities of final goods produced in an economy times their current price Also known as dollar GDP and GDP in current dollars nominal interest rate Interest rate in terms of the national currency (in terms of dollars in Canada) Tells us how many dollars one has to repay in the future in exchange for one dollar today nominal rigidities The slow adjustment of nominal wages and prices to changes in economic activity nonaccelerating inflation rate of unemployment (NAIRU) The unemployment rate at which inflation neither decreases nor increases See natural rate of unemployment non-durable goods Commodities that can be stored but have an average life of less than three years non-human wealth The financial and housing component of wealth non-profit institutions serving household final consumption expenditure The part of household consumption produced in the non-profit sector nonresidential investment The purchase of new capital goods by firms: structures and producer durable equipment nonresidential structures Investment in new buildings by the incorporated business sector normal growth rate The rate of output growth needed to maintain a constant unemployment rate North American Free Trade Agreement (NAFTA) An agreement signed by the United States, Canada, and Mexico in which the three countries agreed to establish all North America as a freetrade zone optimal control The control of a system (a machine, a rocket, an economy) by means of mathematical methods players The participants in a game Depending on the context, players may be people, firms, governments, and so on optimal control theory The set of mathematical methods used for optimal control point-year of excess unemployment A difference between the actual unemployment rate and the natural unemployment rate of one percentage point for one year optimal currency area Two regions that share the same currency are a currency union or currency area If they are in an optimal currency area, then they either experience similar economic shocks or share complete labour mobility ordinary least squares A statistical method to find the best fitting relation between two or more variables Organisation for Economic Co-operation and Development (OECD) An international organization that collects and studies economic data for many countries Most of the world’s rich countries belong to the OECD Organization of Petroleum Exporting Countries (OPEC) A group of countries who export petroleum and make a joint decision on total production of petroleum within their group In the 1970s this group controlled a large proportion of world petroleum production output fluctuations its trend Movements in output around output per capita A country’s gross domestic product divided by its population overnight interest rate The interest rate charged for lending and borrowing overnight overshooting The large movement in the exchange rate triggered by a monetary expansion or contraction panel data set A data set that gives the values of one or more variables for many individuals or many firms over some period of time paradox of saving The result that an attempt by people to save more may lead both to a decline in output and to unchanged saving not in the labour force Number of people who are neither employed nor looking for employment parameter A coefficient in a behavioural equation n-year interest rate See yield to maturity participation rate The ratio of the labour force to the noninstitutional civilian population official international reserves Holdings of foreign assets by the federal government These are held to allow intervention in foreign exchange markets Okun’s law The relation between GDP growth and the change in the unemployment rate Old Age Security (OAS) A major federal program that transfers funds to older Canadians Every Canadian over the age of 65 receives an OAS payment Higher-income older Canadians repay a portion of this payment through their income taxes open market operation The purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply openness in factor markets The opportunity for firms to choose where to locate production and for workers to choose where to work and whether or not to migrate openness in financial markets The opportunity for financial investors to choose between domestic and foreign financial assets openness in goods markets The opportunity for consumers and firms to choose between domestic and foreign goods G6 GLOSSARY patent The legal right granted to a person or firm to exclude anyone else from the production or use of a new product or technique for a certain period of time policy mix See monetary–fiscal policy mix political business cycle Fluctuations in economic activity caused by the manipulation of the economy for electoral gain present value value price level economy See expected present discounted The general level of prices in an price-setting relation The relation between the price chosen by firms, the nominal wage, and the markup primary deficit Government spending, excluding interest payments on the debt, minus government revenues (The negative of the primary surplus.) primary income balance The difference between earnings on foreign assets and payments on foreign debts primary income paid Part of Gross Domestic Product, incomes earned within a national border, is generated by assets owned by non-residents The largest component is interest and dividends on assets within a domestic country owned by non-residents A smaller component is labour income earned by non-residents temporarily working within the domestic country and sending income abroad primary income received Countries earn part of their Gross National Product on assets located beyond their borders The largest component is investment income, interest and dividends on foreign assets A smaller component is labour income earned by domestic residents temporarily working abroad and sending income back home primary labour market A labour market where jobs are good, wages are high, and turnover is low Contrast to the secondary labour market primary surplus Government revenues minus government spending, excluding interest payments on the debt pay-as-you-go social security system Retirement system in which the contributions of current workers are used to pay benefits to retirees private saving (S) Saving by consumers The value of consumers’ disposable income minus their consumption peg The exchange rate to which a country commits under a fixed exchange rate system production function The relation between the quantity of output and the quantities of inputs used in production perfect capital mobility The situation where there are no regulatory controls or barriers placed on the purchase of assets across international borders permanent income theory of consumption The theory of consumption, developed by Milton Friedman, that emphasizes that people make consumption decisions based not on current income, but on their notion of permanent income Phillips curve The curve that plots the relation between (1) movements in inflation and (2) unemployment The original Phillips curve captured the relation between the inflation rate and the unemployment rate The modified Phillips curve captures the relation between (1) the change in the inflation rate and (2) the unemployment rate profitability The expected present discounted value of profits propagation mechanism The dynamic effects of a shock on output and its components propensity to consume (c1) The effect of an additional dollar of disposable income on consumption Also called marginal propensity to consume propensity to save The effect of an additional dollar of disposable income on saving (equal to one minus the propensity to consume) Also called marginal propensity to save public saving (T–G) Saving by the government; equal to government revenues minus government spending Also called the budget surplus (A budget deficit represents public dissaving.) www.downloadslide.net purchasing power Income in terms of goods purchasing power parity (PPP) A method of adjustment used to allow for international comparisons of GDP quantitative easing I (QEI), quantative easing II (QEII) The actions taken by the Federal Reserve during the crisis to increase the money supply even when the interest rate was already zero Quebec Pension Plan (QPP) The major way in which the Quebec government provides pensions to elderly persons in Quebec The QPP is partly a pay-as-you-go plan and partly a funded plan The Canada Pension Plan (CPP) is the equivalent plan for the rest of Canada quits Workers who leave their jobs in search of better alternatives quotas Restrictions on the quantities of goods that can be imported R2 A measure of fit, between zero and one, from a regression An R2 of zero implies that there is no apparent relation between the variables under consideration An R2 of implies a perfect fit: All the residuals are equal to zero random walk The path of a variable whose changes over time are unpredictable random walk of consumption The proposition that if consumers are foresighted, changes in their consumption should be unpredictable rate of growth of multifactor productivity Solow residual See rating agencies Private sector firms in financial markets that offer opinions on the quality of securities issued by firms and governments rational expectations The formation of expectations based on rational forecasts, rather than on simple extrapolations of the past real return bond A bond issued by the federal government that pays a real rate of interest and repays a principal that is indexed to the Consumer Price Index saving rate saved realignment Adjustment of parities in a fixed exchange-rate system scatter diagram A graphic presentation that plots the value of one variable against the value of another variable recession A period of negative GDP growth Usually refers to at least two consecutive quarters of negative GDP growth reference week The particular week in the month when the Labour Force Survey is taken regression The output of ordinary least squares Gives the equation corresponding to the estimated relation between variables, together with information about the degree of fit and the importance of the different variables regression line The best-fitting line corresponding to the equation obtained by using ordinary least squares rental cost of capital See user cost of capital research and development (R&D) Spending aimed at discovering and developing new ideas and products reservation wage The wage that would make a worker indifferent to working or becoming unemployed reserve ratio The ratio of bank reserves to chequable deposits The proportion of income that is savings The accumulated value of past saving Also called wealth secondary income balance The net of tranfers received from the rest of word and transfers made to the rest of the world in the balance of payments secondary labour market A labour market where jobs are poor, wages are low, and turnover is high Contrast to the primary labour market securitization The issuance of securities, based on an underlying portfolio of assets, such as mortgages, or commercial paper seignorage money The revenues from the creation of semi-durable goods Purchases by households of semi-durable goods for consumption Examples include apparel and furniture senior securities Securities that, if bankruptcy of the issuer occurs, are paid before junior securities separations their jobs Workers who are leaving or losing services Commodities that cannot be stored and thus must be consumed at the place and time of purchase reserves These are deposits held by chartered banks and other financial institutions at the Bank of Canada It is another term for settlement balances settlement balances These are deposits held by chartered banks and other financial institutions at the Bank of Canada It is another term for reserves residential investment The purchase of new homes and apartments by people shadow banking system The set of non-bank financial institutions, from SIVs to hedge funds residential structures Investment in the building of new homes share A financial asset issued by a firm that promises to pay a sequence of payments, called dividends, in the future Also called stock rational speculative bubble An increase in stock prices based on the rational expectation of further increases in prices in the future residual The difference between the actual value of a variable and the value implied by the regression line Small residuals indicate a good fit real appreciation An increase in the relative price of domestic goods in terms of foreign goods A decrease in the real exchange rate revaluation A decrease in the exchange rate in a fixed exchange-rate system shoe-leather costs The costs of going to the bank to take money out of a chequing account shocks Movements in the factors that affect aggregate demand and/or aggregate supply real business cycle (RBC) models Economic models that assume that output is always at its natural level Thus all output fluctuations are movements of the natural level of output, as opposed to movements away from the natural level of output Ricardian equivalence The proposition that neither government deficits nor government debt have an effect on economic activity Also called the Ricardo–Barro proposition short run A period of time extending over a few years at most Ricardo–Barro proposition equivalence real depreciation A decrease in the relative price of domestic goods in terms of foreign goods An increase in the real exchange rate risk averse A person is risk averse if he/she prefers to receive a given amount for sure to an uncertain amount with the same expected value slope In a linear relation between two variables, the amount by which the first variable increases when the second increases by one unit real exchange rate The relative price of foreign goods in terms of domestic goods risk neutral A person is risk neutral if he/she is indifferent between receiving a given amount for sure or an uncertain amount with the same expected value real GDP A measure of aggregate output The sum of quantities produced in an economy times their price in a base year Also known as GDP in terms of goods, GDP in constant dollars, GDP adjusted for inflation The current measure of real GDP in Canada is called GDP in (chained) 1997 dollars See Ricardian short-term bond year or less slump A bond with maturity of one A long period of no growth Solow residual The excess of actual output growth over what can be accounted for by the growth in capital and labour solvency The situation in which the value of the bank’s capital is positive risk premium The difference between the interest rate paid on a bond and the interest rate paid on a given bond with the highest rating Stability and Growth Pact An agreement signed by some European countries in 1997 to limit budget deficits and the ratio of debt to GDP See real sacrifice ratio The number of point-years of excess unemployment needed to achieve a decrease in inflation of 1% stabilization program A government program aimed at stabilizing the economy (typically stopping high inflation) real interest rate Interest rate in terms of goods Tells us how many goods one has to repay in the future in exchange for one good today safe haven An expression used to describe a country where assets earn a lower rate of return than in another country because they are perceived as less risky stagflation inflation real oil price The price of crude oil expressed in constant dollars saving The sum of private and public saving, denoted by S real GDP in chained (2007) dollars GDP The combination of stagnation and staggering of wage decisions The fact that different wages are adjusted at different times, making it impossible to achieve a synchronized decrease in nominal wage inflation GLOSSARY G7 www.downloadslide.net standardized employment deficit See cyclically adjusted budget balance (CABB) state of technology The degree of technological development in a country or industry statistical discrepancy A difference between two numbers that should be equal, based on differences in sources or methods of construction Statistics Canada The federal government agency that collects and publishes statistics that describe the economic and social activities of Canadians T-bill See Treasury bill technological catch-up A situation in which a country increases the level of technology in production by using technology developed in other countries technological frontier A situation in which a country is using the highest available level of technology and technological catch-up is not possible technological progress state of technology An improvement in the steady state In an economy without technological progress, the state of the economy where output and capital per worker are no longer changing In an economy with technological progress, the state of the economy where output and capital per effective worker are no longer changing technology balance of payments An estimate of the value of exports of technology minus the value of imports of technology stock A variable that can be expressed as a quantity at a point in time (such as wealth) Also a synonym for share TED spread The difference between the interbank lending rate and the treasury bill rate in the United States stocks An alternative term for inventories term structure of interest rates See yield curve strategic interactions An environment in which the actions of one player depend on and affect the actions of another player time inconsistency In game theory, the incentive for one player to deviate from his previously announced course of action once the other player has moved structural deficit See cyclically adjusted budget balance (CABB) structural rate of unemployment of unemployment See natural rate structured investment vehicle (SIV) Financial intermediaries set up by banks SIVs borrow from investors, typically in the form of short-term debt, and invest in securities subprime mortgages Mortgages with a higher risk of default by the borrower subprimes See subprime mortgages sudden stops A situation in which there is a sudden reduction in the willingness of investors to purchase securities denominated in the currency of a country supply shock An unexpected macroeconomic event that reduces the level of the natural rate of output and increases the level of the natural rate of unemployment target for the overnight rate The Bank of Canada announces a target range for the overnight funds rates and acts to keep the actual overnight funds rate within the bounds of their announced target target interest rate rate See target for the overnight tariffs Taxes on imported goods taxes less subsidies on production The value of taxes paid in the course of production when such taxes not vary with the quantity or value of production taxes less subsidies on products and imports The value of taxes paid in the course of production when such taxes vary with the quantity and value of production Taylor rule A rule, suggested by John Taylor, telling a central bank how to adjust the nominal interest rate in response to deviations of inflation from its target, and of the unemployment rate from the natural rate G8 GLOSSARY technology gap The differences between states of technology across countries Tobin’s q The ratio of the value of the capital stock, computed by adding the stock market value of firms and the debt of firms, to the replacement cost of capital total wealth The sum of human wealth and nonhuman wealth toxic assets Assets held by banks in the crisis that were of little value trade balance The difference between exports and imports Also called net exports trade deficit A negative trade balance; that is, imports exceed exports trade surplus A positive trade balance; that is, exports exceed imports trade-weighted real exchange rate eral real exchange rate See multilat- transfers See government transfers transfers to other levels of government Monetary transfers from one level of government to another transfers to persons Transfers of money from a government to a person transfers to the provinces Federal government tax revenues that are given to the provinces Treasury bill A government bond with a maturity of up to one year Both the U.S and Canadian governments issue such bills Also called the T-bill unanticipated money Movements in nominal money that could not have been predicted based on the information available at some time in the past uncovered interest parity relation An arbitrage relation stating that domestic and foreign bonds must have the same expected rate of return, expressed in terms of the domestic currency underwater mortgage The situation in which the value of the mortgage on a property exceeds the value of the property Unemployment Insurance Insurance See Employment unemployment rate The ratio of the number of unemployed to the labour force usable observation An observation for which the values of all the variables under consideration are available for regression purposes user cost of capital The cost of using capital over a year, or a given period of time The sum of the real interest rate and the depreciation rate Also called the rental cost of capital value added The value a firm adds in the production process, equal to the value of its production minus the value of the intermediate inputs it uses in production velocity The ratio of nominal income to money; the number of transactions for a given quantity of money, or the rate at which money changes hands vicious circle A situation in which, with a large amount of government debt outstanding, the debt is perceived to become more risky and the interest rate on the debt rises The consequent increase in interest payments then increases the deficit and the debt wage indexation A rule that automatically increases wages in response to an increase in prices wage-price spiral The mechanism by which increases in wages lead to increases in prices, which lead in turn to further increases in wages, and so on wage-setting relation The relation between the wage chosen by wage setters and the unemployment rate wages and salaries work Payments to persons who war of attrition Occurs when both parties to an argument hold their ground, hoping that the other party will give in Troubled Asset Relief Program (TARP) Part of the U.S response to the financial crisis in 2008 was both the purchase of assets from banks and the direct purchase of shares in banks to help maintain bank liquidity wealth t-statistic A statistic associated with an estimated coefficient in a regression that indicates the level of confidence that the true coefficient differs from zero yield curve The relation between yield and maturity for bonds of different maturities Also called the term structure of interest rates twin deficits A positive relationship sometimes observed in which a large government debt is associated with a large current account or trade deficit See financial wealth wholesale funding Bank issue of short-term debt to create funds to re-lend in place of attracting deposits to lend yield to maturity The constant interest rate that makes the price of an n-year bond today equal to the present value of future payments Also called the n-year interest rate www.downloadslide.net INDEX Note: bold-faced page references identify definitions; f following a page reference indicates a figure or photo; t following a page reference indicates a table; and n following a page reference indicates a footnote A above the line, 116 accelerationist Phillips curve, 234 accommodation, 410 accommodative, 217 Acemoglu, Daron, 556, 556f activity, and unemployment, 25 adaptive expectations, 463 adjusted nominal money growth, 251 Africa, 298–299, 346 The Age of Diminished Expectations (Krugman), 497 aggregate consumption, 430 aggregate demand see also aggregate demand relation exchange rates in medium run, 267–268 under fixed exchange rates, 272–273 fluctuations in, 199 and liquidity trap, 205f and monetary policy, 154 in open economy under fixed exchange rates, 273–277, 273f in open economy with expected inflation, 268, 268f shocks, 199, 200 aggregate demand curve, 188, 188f, 192, 223 aggregate demand relation, 187–189, 190, 246, 272, 276 derivation, 188–189 inflation, 249 money growth, 249 aggregate output, 20–24 determinants of level of aggregate output, 30–31 gross domestic product (GDP), 20–22 and monetary policy, 154 aggregate private spending, 457–458 aggregate production function, 300–301 aggregate supply see also aggregate supply exchange rates in medium run, 266 and expected inflation, 266, 266f in open economy under fixed exchange rates, 273–277, 273f in open economy with expected inflation, 268, 268f shock to, 204 aggregate supply-aggregate demand model See AS-AD model aggregate supply curve, 186, 186f, 190–192 aggregate supply relation, 185, 190, 273, 276 derivation, 185–187 Phillips curve, 237, 244 Aghion, Philippe, 556, 556f AIDS, 367 Akerlof, George, 555, 555f Alberta, 223, 299 Alberta Federation of Labour, 358 Alberta Treasury, 493 algebra, 47–48 American Recovery and Reinvestment Act, 218 amplification mechanisms, 215–217 animal spirits, 463, 548 annual T-bill rate, 379 anticipated money, 196 antitrust legislation, 177 appreciation, 110 nominal appreciations, 110 real appreciation, 112, 113f appropriability, 339–340 arbitrage, 120, 403, 408n and bond prices, 402–403 relation between interest rates and exchange rates, 120–121 riskless arbitrage condition, 119n and stock prices, 426–427 Argentina, 284, 285, 295, 394 Armenia, 530 AS-AD model, 208–209 budget deficit, decrease in, 197–199 equilibrium output in short run and medium run, 189–192 liquidity trap See liquidity trap monetary expansion, effects of, 193–195 policy and the business cycle, 199–200 propagation mechanisms, 199 shocks, 199, 220–224 short run vs medium run, 199 supply shock See supply shock Asia, 298 asset trades, 115 assets domestic assets, 118–121 foreign assets, 118–121 interest-paying assets, 118 austerity, 6, 11, 463, 467, 535 Australia, 492, 531 Austria, 108 automatic stabilizer, 525 autonomous spending, 47, 49, 49f average hours, 355, 355f B backloading, 468 balance of payments, 116–118 in Canada, 116t current account, 116–117 current account balance, 117 financial account, 117–118 balance sheet banks, 69f, 71f, 212–213, 213f, 215 central bank, 66, 66f, 69f, 162 balanced budget, 47 balanced-budget law, 485–487 balanced growth, 335–336, 335t Baldwin, John, 345n Ball, Laurence, 261 bands, 156 Bank for International Settlements, 557 Bank of Canada, 58, 257 see also monetary policy Bank Rate, 74 challenges from crisis, 508–511 currency outstanding, 64 disinflation in Canada, 1988 to 1993, 258–261 exchange rate, 507–508 flexible exchange rate, 280 housing prices, 509 inflation target, 30, 392, 497, 498t, 499 instruments of monetary policy, 504–505 mandate, 503 monetary contraction, 154 optimal inflation rate, 496–499 practice of policy, 505 publications, 17 target for the overnight rate, 504, 505f target interest rate See target interest rate target ranges for inflation, role of, 506–507 website, 503 world economic crisis, macroeconomic policy to, 200–201 Bank of Canada Act, 503 Bank of Canada Banking and Financial Statistics, 62 Bank of Canada Review, 17 Bank of England, 511 Bank of Montreal, 362 Bank Rate, 74 bank runs, 70 Banking and Financial Statistics, 17 banking collapse, 217–220 banking crisis, 217–220 banks see also financial intermediaries balance sheet, 69f, 71f, 212–213, 213f, 215 demand for bank money, 69 deposit insurance, 70 functions of, 68–69 leverage, 213–214, 510 and liquidity trap, 212–213 mergers, 214 publications, 17 reserves, 68–69 shadow banking system, 214 TED spread, 215–216, 216f bargaining power, 171–172 Barro, Robert, 196, 196n, 551, 551f base year, 36 Basel II, 510 Basel III, 510 Beaulieu, Joseph, 443 behavioural economists, 557 behavioural equation, 43 Belgium, 130, 158, 159f below the line, 116 Bernanke, Ben, 555, 555f best available choice, 451–452, 451f bilateral real exchange rate, 115 Black October, 412 Blair, Tony, 481 Blanchard, Oliver, 241, 242n Blinder, Alan, 482 Bolivia, 394 bond prices and arbitrage, 402–403 and interest rate, 66–67 as present values, 400–402 and the yield curve, 400–407 bond ratings, 401 bonds, 59 bond prices See bond prices Brazilian bonds, 121 Canada bonds, 401 corporate bonds, 401 coupon bonds, 401 default risk, 400 discount bonds, 400, 401 domestic bonds, 146 expected returns, 118f, 418, 418f, 419f foreign bonds, 146 government bonds, 70, 401 indexed bonds, 401, 494 interest rate, 60 junk bonds, 401 long-term bonds, 401 maturity, 400 medium-term bonds, 401 vs money, 146 and money supply, 75 n-year interest rate, 403–404 nongovernment bonds, 70 open market, 66 real return bonds, 401 risk, 404 risk premium, 401, 404 short-term bonds, 401 terminology, 401 yield to maturity, 400, 403–404 Botswana, 298 bracket creep, 493 Brazil, 121 Bretton Woods agreement, 264, 265 Britain See United Kingdom British Columbia, 484–485 broad money, 501 Bruno, Michael, 481 bubbles, 412–413 budget balanced budget, 47 Conservative government, 538–543 deficits See deficit government budget constraint, 518–524 Liberal government, 535–538, 537t surplus, 54 budget line, 449 Bulgaria, 14 Bundesbank, 158, 279, 503 Bureau of Economic Analysis (BEA), 248 Bush, George W., 99 business cycle theory, 548 business cycles, 199–200 C Canada, 7–8, 7f balance of payments, 116t bond ratings, 401 Budget, 2012, 318 budget deficits since 2000, 5f capital accumulation, 318–319 change in inflation vs unemployment, 1970–2012, 234f coordination, 134 corporate investment and profits, 439f debt-to-GDP ratio, 523, 531 disinflation, 258–261 economic crisis, economic statistics, 17 emigration, 356–359 employment, 165t employment-to-population ratio, 354–355, 354f expansionary fiscal policy, 55 exports, 127, 487 exports as ratio of GDP, 1961–2012, 108f federal cyclically adjusted budget balance, 525–526, 526f federal structure, financial market regulation, 510–511 fiscal consolidation, 94–95 fiscal policy since 1993, 534–543 fiscal stimulus, 474 GDP growth measures, release of, 248 Great Depression, 210 growth, 8, 8t growth in labour input to production, 354–359 immigration, 356–359 imports as ratio of GDP, 1961–2012, 108f inflation, 259t, 506f inflation rate, 8, 8t, 28f, 230f, 232f inflation target, 499, 501 interaction with world, 365f international portfolio, 362–364, 363t, 364f IS-LM model, empirical representation, 101, 102–103f INDEX I1 www.downloadslide.net Canada (continued) labour force, 165t labour productivity, 344–345, 344t level of indebtedness, 517 macro variables, selected, 94t major macroeconomic variables, 155t Martin-Thiessen policy mix, 94–95 merchandise trade, 115t monetary contraction, 154 multifactor productivity growth, 351f multiplier, 133 natural rate of unemployment, 239 net international investment position, 364 nominal interest rates, 121, 122f optimal inflation rate, 496–499 output per capita, 291, 294 population, 165, 165t projected components of population growth, 357t real GDP, 23f, 291f real GDP per capita, 291f recessions in, 52, 52t, 140, 405, 405f research and development (R&D), 337, 338 residential housing market, 414–416, 414f, 415f, 417 savings rate, 308 sources of population growth, 356f technology balance of payments, 367t temporary foreign workers, 358–359, 358f trade balance, 139, 141f Treasury bill rates, 122f unemployment, 30, 165t, 259t unemployment data, 25 unemployment rate, 6f, 8, 8t, 230f, 232f, 233f, 241f world economic crisis, macroeconomic policy to, 200–201 yield curves, 400f, 406, 406f Canada bonds, 401 Canada Deposit Insurance Corporation, 70 Canada Pension Plan (CPP), 44, 318, 452 Canada Pension Plan Investment Board, 319 Canada-U.S exchange rate, 110, 111, 111f, 114f, 507f Canada-U.S productivity gap, 344–345 Canadian dollar see also Canada-U.S exchange rate from 1998 to 2012, 420–421 appreciation, 110, 110f depreciation, 110f, 270 nominal exchange rate, 111f Canadian International Development Agency, 117 Canadian Pacific Railways, 362, 386 Canadian provinces, growth across, 299 CANSIM II, 17 capital depreciation rate of, 334 dynamics of capital and output, 310–312, 311f, 334–336, 334f equipping workers with capital in open economy, 359–366 golden-rule level of capital, 316–317 human capital, 323–326, 326, 338 output, effects of, 308–309 and output, interactions between, 308–310, 308f, 333–334 per effective worker, 332, 332f, 334–336, 334f, 336 per worker, 301, 302f, 311, 312, 317 physical capital, 323–326 ratio of profit to capital and ratio to output to capital, 442f rental cost of capital, 437 steady state, 312–313 technological progress, 333–336 capital accumulation, 14, 302 in Canada, 318–319 China, 341–343 I2 INDEX France, post-war, 313 human capital accumulation, 324 and investment, 310 output, effects of, 309–310 physical capital accumulation, 324 physical vs human capital, 323–326 vs technological progress, 340–343 capital augmenting, 331n capital controls, 107 capital gains, 492–493 capital income, 21 capital ratio, 213 capital stock, 310, 316, 331 Carney, Mark, 441, 511 Case, Karl, 434, 434n Case-Shiller index, 211 cash flow, 441 Cavallo, Domingo, 285 CDOs, 215 Central African Republic, 298 central bank balance sheet, 66, 66f, 69f, 162 Canada See Bank of Canada challenges from crisis, 508–511 conservative central banker, 481 credibility, 480–482 exchange rate crises, 278 independence of, 480–481, 481f target interest rate See target interest rate transparency, 481–482, 483f central bank money, 69 see also money demand for of, 69–71, 71f supply of, 69–71, 71f Central Europe, 342 central parity, 156 chain-type indexes, 35–37 Charlottetown Accord, 474 chartered banks See banks chequable deposits, 59, 67–68, 68, 69 Chile, 394 China, 12–14, 13f capital accumulation vs technological progress, 341–343 Cultural Revolution, 342 GDP per worker, 348 Great Leap Forward, 342 growth, 13–14, 13t, 341–343, 343t, 345 inflation rate, 13, 13t oil prices, 221 output per capita, 298 output per person, 12 patents, 340 savings rate, 308 unemployment rate, 13, 13t Chrétien, Jean, 94, 497, 536, 538 Churchill, Winston, 276, 277 CIC (Citizenship and Immigration Canada), 359 Citigroup, 214 Clinton, Bill, 482 closed economy assumption of, 42 fiscal policy, 158 government spending, change in, 153 LM relation, 151 new physical capital, creation of, 359–360 population change, 355–356 price level and output, 273 save or buy decision, 109 trade deficit, 130 coalition government, 539 Cobb, Charles, 328 Cobb-Douglas production function, 328–329, 328–329 Coca-Cola, 363 collateral, 220 collateralized debt obligations (CDOs), 215 collective bargaining, 171 Coloumbe, Serge, 299 common currency, common currency area, 11 complexity, 214–215 compounding, 294 Conservative government, 135, 318, 484, 485, 535, 538–543 consols, 386 constant interest rates, 385 constant interest rates and payments, 385–386 constant interest rates and payments, going on forever, 386 constant returns to scale, 301 consumer confidence, 199, 435 Consumer Price Index (CPI), 27, 245 average annual rate of inflation, 270 Canadian inflation rate, 28f inflation, 258 United States, 221 consumer spending See consumption consumption, 41 aggregate consumption, 430 announced tax cuts, 434 annual consumption per capita, 293 best available choice, 451–452, 451f changes in value of houses, 434 choices, and wealth, 449, 449f choices in two-period model, 448f composition of, 126 consumer choices, 448–449, 448f current income, 432–433, 435 demand for goods, 43–46 determinants of, 126 and disposable income, 44f and expectations, 430–435, 448–454 higher expected future income, 452– 453, 452f inability to borrow against future income, 453–454, 454f indifference curves, 450, 450f, 451f life cycle theory of consumption, 430 liquidity-constrained consumer, 454 marginal propensity to consume, 43 nonhuman wealth, change in, 453, 453f open economy, 360 per worker in steady state, 317, 317f propensity to consume, 43 random walk of consumption, 553 retirement, 433–434 steady-state consumption, 322, 322t stock market, and increase in consumer spending, 410–411, 411f theories of, 549 theory of the very foresighted consumer, 430–431 in United States, 45f volatility of, 443–444, 445f without international borrowing, 372t consumption function, 43 contractionary open market operation, 67, 188 “A Contribution to the Theory of Economic Growth” (Solow), 300 convergence, 294–295, 298 coordination, 134 core inflation, 506 corporate bonds, 401 cost of high unemployment, of inflation, 492–494 menu cost, 555 opportunity cost of holding money, 388 rental cost of capital, 437 shadow cost, 439 shoe-leather costs, 492 user cost, 437, 439 cost of living index, 27 Council of Economic Advisers, 17 countercyclical fiscal policy, 539–541, 540t coupon bonds, 401 coupon payments, 401 coupon rate, 401 covered interest parity condition, 119n Cozier, Barry, 260, 260f crawling pegs, 155–156 creative destruction, 556 credibility, 256, 480–482 credit cards, 64 credit easing, 464 credit market interventions, 464 crisis See economic crises Crow, John, 245, 258, 392, 496, 497 Crowe, Christopher, 511n culture of entrepreneurship, 338 currency, 59, 64 see also money currency board, 284, 285 currency overvaluation, 277 current account, 116–117, 374 current account balance, 117, 361 current nominal interest rate, 460 current statistics, 16–17 current yield, 401 cyclically adjusted budget balance (CABB), 524–527, 527t D The Daily, 17 dead money, 441 debit cards, 64 debt see also deficit benefit of international debt, 364–366 dangers of very high debt, 527–531 default, 528–529 deficit vs debt, 516 foreign debt, accumulation of, 360–362 optimal amount of foreign borrowing, 370–374 and primary surpluses, 522 repayment, 519–522, 521f rolling over debt, 361 stabilization, 521f vicious circle, 528 debt finance, 407 debt monetization, 529 debt ratio, 517, 522–524, 531–532, 532t see also debt-to-GDP ratio debt rescheduling, 528 debt restructuring, 528 debt-to-GDP ratio, 484, 484f, 517, 522–524, 524, 531–532, 532t decisions, and expectations, 457–460, 457f decreasing returns to capital, 301 decreasing returns to labour, 301 default risk, 400, 528 deficit, 54, 518 see also debt vs debt, 516 decrease in, 197–199, 197f, 198f see also deficit reduction excessive deficit procedure, 487 full-employment deficit, 524 G7 countries, 95t and government budget constraint, 518 inflation-adjusted deficit, 518 measurement of, 519, 520f output and interest rate, 197–199, 198f primary deficit, 518–519 structural deficit, 524 twin deficits, 532–534, 534f United States, 5f, 6, 147 in United States, Canada and euro area since 2000, 5f deficit reduction see also deficit and expectations, 462–469 fiscal contraction or consolidation, 89 fiscal expansion, 89 and investment, 92 long run, 466 medium run, 462, 465–466 and monetary expansion, 95f and output, 462–469 output expansion, 467–468 short run, 462–463 www.downloadslide.net deflation, 209, 231, 238–239, 275n and liquidity trap, 208–209 and real interest rate, 382 deflation trap, 382 DeGrauve, Paul, 196, 196n Dell’Ariccia, Giovanni, 511n demand and autonomous spending, 49 for bank money, 69 for central bank money, 69–71, 71f decreases in demand, 51 for domestic goods See demand for domestic goods foreign demand, 132f for goods, 42–46 and income, 49 increases in demand, 51 IS curve, 83 labour demand, 182–183 money See money demand plotting, as function of income, 48 reserves, 72, 73–74 demand for domestic goods, 126 consumption, 126 determinants of, 126–128 domestic demand for goods, 126, 127, 128f, 130 exports, 127–128 imports, 126–127 investment, 126 Denmark, 11–12 deposit insurance, 70, 215, 220 depreciation, 110, 270, 277 effects of, 136–137 investment rates net of, 324 nominal depreciations, 110 per worker, 311 rate of capital, 334 real depreciation, 112, 113f and the trade balance, 136–137 depreciation rate, 310, 436 depressions, 209 devaluations, 111, 155, 271, 275–277 development economics, 299, 345–346 Diamond, Doug, 557 Diamond, Peter, 494, 555 Diewert, W Erwin, 344, 345n direct clearers, 504 direct investment abroad, 362–363 discount bonds, 400, 401 discount factor, 384 discount rate, 384 discouraged workers, 25 disinflation, 252–255, 254t, 257f, 258–261 disposable income, 43, 44, 44f, 45f dividends, 407 Dodge, David, 392 dollar GDP, 23 see also nominal GDP domestic assets, 118–121 domestic demand for goods, 126, 127, 128f, 130 domestic goods, 109 Dornbusch, Rudiger, 553, 553f Douglas, Paul, 328 Dow Jones Industrial Index, 407, 412 drug patents, 367–368 dual labour market, 168 duration of unemployment, 166, 170f Dybvig, Philip, 557 dynamic stochastic general equilibrium (DSGE) models, 556 dynamics, 51 budget deficit, decrease in, 197f, 198f of capital and output, 310–312, 311f, 334–336, 334f of capital per worker, 333 monetary expansion, effects of, 193, 193f, 194f oil prices, increases in, 222–224, 223f open economy, 138–140 of output and price level, 190–192 saving rate, increase in, 320–322, 321f E Easterlin, Richard, 296 Easterlin paradox, 296 Eastern Europe, 342, 346 econometrics, 50, 235 Economic Action Plan, 30, 135, 201, 527, 540, 541, 542 economic activity and stock market, 409 and yield curve, 404–407 The Economic Consequences of Mr Churchill (Keynes), 276 economic crises financial crisis, 3–4 policy responses, 4–5 world economic crisis, 3–7, 200–201 Economic Reference Tables, 17 Economic Report of the President, 17 Economic Statement, 201, 434 economic statistics, 16–18 The Economist, 16, 121, 382, 416, 417 The Economist house-price indicators, 417t Ecuador, 394 education, 324, 344 effective demand, 548 see also aggregate demand effective labour, 332, 335 effective real exchange rate, 115 effective tax rate, 493 efficiency wages theories, 172–173, 555 emerging countries and risk perceptions, 147 volatility of capital flows to, 148f emigration, 356–359 employment, 308 from employment to output, 179 employment-to-population ratio, 354–355 full employment in open economy with positive inflation, 268–271 natural level of employment, 178, 182f total employment, 354 from unemployment to employment, 178 employment insurance, 41, 174 Employment Insurance Plan, 44 Employment Insurance premiums, 543 employment rate, 167 employment-to-population ratio, 354–355 endogenous growth, 325–326 endogenous variables, 46 Equatorial Guinea, 298 equilibrium, 47 algebra, 47–48 alternative ways of looking at, 73–74 in central bank money market, interest rate announcement, 76–77, 77f determination of equilibrium output, 46–51 financial markets, 64, 86–87, 87f, 88, 150–151 in goods market See equilibrium in the goods market graph, 48–50 interest rate, 63–65 investment and saving, focus on, 53–54 in money market, interest rate announcement, 76, 76f in open economy with fixed exchange rates, 272 output See equilibrium output real wages, and unemployment, 176–178 summary in words, 50 and supply and demand for money, 74 unemployment rate, 177 equilibrium condition, 47 equilibrium in the goods market, 47, 48f, 82–84, 129, 146, 150–151, 457 equilibrium output, 46–51 adjustment of, 51 and interest rates, 389f in medium run, 189–192 and net exports, 129f and price level, 189, 189f in short run, 189–192 and the trade balance, 129, 129f equity finance, 407 equity premium, 427 euro, 9, 264, 283 benefits of, 12 and fixed exchange rates, 155–156 history of, 283–284 euro area, 9–12, 10f see also Europe budget deficits, 5f, 486f common currency, Euro Plus Pact, 487 excessive deficit procedure, 487 fixed exchange rate, 278–280, 282 growth, 9–11, 11t inflation rate, 11, 11t inflation targeting, 501 recessions, 12 Stability and Growth Pact, 486–487 unemployment, reducing, 11–12 unemployment rate, 6f, 9–11, 11t Euro Plus Pact, 487 euro zone See euro area Eurobarometer Survey, 29 euroland See euro area Europe see also euro area from 1500 to 1700, 297 bilateral real exchange rate, 115 default risk, and interest rates, 528 economic crisis, unemployment rate, 241, 242f European Central Bank, 11, 283, 501, 503 European Commission, 282, 487 European Community (EC), European Council, 487 European Monetary System (EMS), 156, 158, 278–280 European Union, 9, 283, 486 see also euro area ex-ante real interest rate, 381 ex-dividend price, 408 ex-post real interest rate, 381 exchange rate bilateral real exchange rate, 115 Bretton Woods agreement, 264, 265 Canada-U.S exchange rate, 110, 111, 111f, 114f, 507f choosing between exchange rate regimes, 280–285 conventional definitions, 110 crises, 277–280 devaluations, 111 and domestic interest rate, 149, 150f effective real exchange rate, 115 and expectations, 416–423 and fiscal policy, 137 fixed exchange rates, 111, 155–158, 271–277 flexible exchange rates, 265–271, 280, 281, 421–423 forward exchange rate, 119n and interest rates, arbitrage relation between, 120–121 medium run See exchange rates in medium run and monetary policy, 421–423, 422f, 507–508 multilateral real exchange rate, 115 nominal exchange rates, 109–111, 110f, 111f, 114f, 265–271 overshooting, 423 overshooting model of exchange rates, 553 pegging exchange rate, and monetary control, 156–157 real exchange rate See real exchange rate revaluations, 111 trade-weighted real exchange rate, 115 exchange rate crises, 277–280 exchange rate mechanism (ERM), 156, 279 exchange rates in medium run see also exchange rate aggregate demand, 267–268 aggregate supply, 266 fixed nominal exchange rate, 274–275 flexible exchange rates, 265–271 nominal exchange rate, 265–271 exogenous variables, 46, 92 expansionary fiscal policy, 201, 218 expansionary monetary policy, 405, 461f expansionary open market operation, 67 expansions, 24 fiscal expansion, 89 monetary expansion, 93 signs of, during crisis, expectations about the future, 465–466 adaptive expectations, 463 announced tax cuts, 434 bond prices and the yield curve, 400–407 bubbles, 412–413 changes in value of houses, 434 and consumption, 430–435, 448–454 and credibility, 256 in current period, 466–469, 466f and decisions, 457–460, 457f and deficit reduction, 462–469 and exchange rate movements, 416–423 expected present discounted value, 383–387 fads, 412–413 and investment, 435–442 IS curve, 458, 458f and IS relation, 457–459 liquidity trap, 464 and LM relation, 459–460 and monetary policy, 423, 460–462 natural experiments, 433–434 and output, 460–469 and policy, 478–482 of profit, 435–437, 439–440 quantitative easing, 464 rational expectations, 462, 463 retirement, 433–434 stock market and movements in stock prices, 407–411 expectations-augmented Phillips curve, 234 expectations hypothesis, 402 expected future profits, 439 expected inflation, 230–231, 479 expected present discounted value, 383 see also present value computation of, 383–385, 384f constant interest rates, 385 constant interest rates and payments, 385–386 constant interest rates and payments, going on forever, 386 derivation using real or nominal interest rates, 397–398 general formula, 384–385 nominal vs real interest rates, 387 using, 385–387 zero interest rates, 386–387 expected present value of profits, 455 expected price level, 173, 179 expected profits, 435–437, 439–440 expected returns, 118f, 418, 418f, 419f exports, 42 demand for domestic goods, 127–128 determinants of, 127 equilibrium output, and net exports, 129f INDEX I3 www.downloadslide.net exports (continued) and gross domestic product, 109 net exports, 42, 128 net exports, and demand for domestic goods, 128f as ratio of GDP in Canada, 1961–2012, 108f technology, 366–368 expropriation, 345–346, 346f F face value, 401 factor markets See openness in factor markets fads, 412–413 federal deposit insurance, 70 Federal Reserve, 3, 99, 100, 218, 220, 464, 503 Federal Reserve Bank of St Louis, 17 Federal Reserve Board, 71, 482 Federal Reserve Economic Database, 17 fertility of research, 338–339 final goods and services, 20–21 financial account, 117–118 financial assets, 59 financial crisis, 3–4 financial intermediaries, 68, 212 see also banks financial investment, 59 financial markets, 58 asset trades, 115 bond prices and the yield curve, 400–407 bubbles, 412–413 demand for money See money demand equilibrium, 64, 86–87, 87f, 88, 150–151 fads, 412–413 globalization, effect of, 365 and goods market See IS-LM model interest rate, determination of, 63–75, 65f, 73f and LM relation, 85–86 openness in financial markets See openness in financial markets parity, maintenance of, 284 rational bubbles, 412–413 realignments, 279 residential housing markets in North America, 1987–2012, 414–416, 414f, 415f and slope of yield curve, 404, 407 stock market and movements in stock prices, 407–411 target interest rate, 75–77 Financial Post, 417 financial wealth, 59 fine tuning, 478 fire sale prices, 215 fiscal consolidation, 89, 94–95, 535–536 see also deficit reduction fiscal contraction, 89, 92 fiscal dominance, 529 fiscal expansion, 89, 157, 157f Fiscal Monitor, 17, 18 fiscal policy, 46, 516–517 see also macroeconomic policy and AS-AD model, 200 automatic stabilizer, 525 balanced budget, 474 in Canada since 1993, 534–543 Conservative government, 538–543 countercyclical fiscal policy, 2009–2011, 539–541, 540t cyclically adjusted budget balance, 524–527 dangers of very high debt, 527–531 default risk, 528 deficits, 524–527 effects of, 94t and exchange rates, 137 expansionary fiscal policy, 55, 201, 218 fiscal dominance, 529 I4 INDEX fiscal plan under majority government, 2011–2015, 542–543, 542t fixed exchange rates, 157–158 government budget constraint, 518–524 and high debt, 218 inflation, and high levels of debt, 531 with interest rate target, 97–98 IS-LM model, 89–92 Liberal government, 535–538, 537t limits of, 218 and liquidity trap, 217–218, 217f money finance, 529–531 neutrality of, 533 open economy, 152–153 output stabilization, 524–527 policy mix, 95 response to crisis, restraint, 474 in short run, 533 twin deficits, 532–534, 534f and uncertainty, 475–478 vicious circle, 528 wars of attrition, 485 Fiscal Reference Tables (FRT), 525 fiscal stimulus, 2009, 134–135 Fischer, Stanley, 257, 481, 553, 553f, 555 Fisher, Irving, 392 Fisher effect, 392, 393–395 Fisher hypothesis, 392, 393–395 fixed election dates, 484–485 fixed exchange rates, 111, 155–158 and adjustment of real exchange rate, 271–277 aggregate demand, 272–273 bands, 156 benefits of, 282–284 countries operating under, 155 crawling pegs, 155–156 exchange rate crises, 277–280 fiscal expansion, 157, 157f fiscal policy, 157–158 and imperfect capital mobility, 162 and interest rates, 161–162 limited costs of, 281–282 and monetary control, 156–157 monetary policy, 156–157 pegs, 155–156 and perfect capital mobility, 156, 161–162 fixed investment, 41 see also investment Flaherty, Jim, 135, 509, 539 Fleming, Marcus, 144 flexible exchange rates, 265–271, 280, 281, 421–423 float, 279 flow, 59 force of compounding, 294 Ford, Henry, 172 foreign aid, 360 foreign assets, 118–121 foreign bonds, 146 foreign borrowing, 370–374 foreign debt, accumulation of, 360–362 foreign demand, 132f foreign direct investment, 363 foreign exchange, 115 foreign-exchange reserves, 161 foreign goods, 109 foreign investors, 147 foreign output, 272 foreign portfolio investment, 363–364 formal education, 324 forward exchange rate, 119n four tigers, 298 France, 12, 158, 159f annual rates of growth and technological progress, 341t coordination, 134 excessive deficit procedure, 487 output per capita, 291, 294, 295 post-war capital accumulation and growth, 313 research and development (R&D), 337, 338 retail sales, 443 Frank, Barney, 135 Friedman, Milton, 235, 236, 236n, 395, 430, 478, 499, 549, 550, 550f full-employment deficit, 524 full employment in open economy with positive inflation, 268–271 full-time students, 167 fully funded, 318 fundamental value, 412 funded, 318 future pension, 453n G G20, 134–135, 517 G-8, 134 Gali, Jordi, 556, 557f Gallup World Poll, 297 game, 478 game theory, 478, 552 GDP adjusted for inflation, 23 see also real GDP GDP deflator, 26–27 Canadian inflation rate, 28f and nominal exchange rate, 112 GDP growth, 24, 540 GDP in 2007 dollars, 23 see also real GDP GDP in constant dollars, 23 see also real GDP GDP in current dollars, 23 see also nominal GDP GDP in terms of goods, 23 see also real GDP GDP per capita, 292, 293 growth rate, 298, 298f, 299f PPP GDP per capita, 345 and protection from expropriation, 345–346, 346f real GDP per capita, 291f general government, 516–517, 517t The General Theory of Employment, Interest and Money (Keynes), 53, 81, 463, 548, 549 geometric series, 50, 386 Gerlich, Sebastian, 260, 260f Germany, 95 Bundesbank, 158 coordination, 134 cyclically adjusted budget balance (CABB), 527 debt-to-GDP ratio, 523 excessive deficit procedure, 487 export ratios, 108, 109t hyperinflation, 530 inflation, 279 interest rates, 280 level of indebtedness, 517 output per capita, 293–294 research and development (R&D), 338 unification, 158–159, 159f Gertler, Mark, 555 Global Financial Stability Report, 18 globalization, 108, 365 gold standard, 276 golden-rule level of capital, 316–317, 322–323 goods demand for goods, 42–46 domestic goods, 109 final goods and services, 20–21 foreign goods, 109 intermediate good, 21 new capital goods, 41 relative price of, 112 Goods and Services Tax (GST), 258 goods market composition of gross domestic product, 41–42, 41t demand for goods, 42–46 equilibrium, 47, 53–54, 82–84, 129, 457 equilibrium output, 46–51 and financial markets See IS-LM model and IS relation, 82–85 in open economy See open economy openness in goods markets See openness in goods markets Google Trends, 45 government coalition government, 539 coordination, 134 debt repayment, 519–522, 521f and output level, 54–55 transfers to other levels of government, 537 government bonds, 70, 401 government budget constraint, 518–524 current vs future taxes, 519–522 debt and primary surpluses, 522 debt-to-GDP ratio, evolution of, 522–524 government spending, 41 demand for domestic goods, 126 demand for goods, 46 effects of higher government spending, 131f federal spending in Canada, 1993–2011, 537f increase in, and interest rate target, 97f increase in, effects of, 152, 153f Japan, 219f in open economy with fixed exchange rates, 272 government transfers, 41 Great Depression, 4, 44–45, 204, 209, 210, 229, 557–558 causes of, 168 debt-to-GDP ratio, 523 deflation, 499 deflation and real interest rate, 382 inflation, John Maynard Keynes, 548 and natural employment rate, 239 ratio of debt to GDP, 484 stock prices, fall of, 413 unemployment benefits, 26 unemployment rate, 168 Greece, 12, 284, 528 Greenspan, Alan, 98, 412 Griliches, Zvi, 339 gross domestic product (GDP), 20, 119 Canadian exports as ratio of GDP, 1961–2012, 108f Canadian imports as ratio of GDP, 1961–2012, 108f composition of, 41–42, 41t consumption, 41 debt-to-GDP ratio, 484, 484f and exports, 109 final goods and services, 20–21 government spending, 41 vs gross national product (GNP), 119 growth in, vs change in unemployment rate, 1982–2012, 26f income side, 21–22, 22t investment, 41 and net factor payments in Kuwait, 119t nominal GDP, 22–24 see also nominal GDP production side, 20–21 real exchange rate and ratio of net exports to GDP in Canada, 1970–2012, 141f real GDP, 22–24 see also real GDP release of GDP growth measures, 248 value added, 21 gross national product (GNP), 20, 119, 533 vs gross domestic product (GDP), 119 and net factor payments in Kuwait, 119t www.downloadslide.net growth, 290 see also output growth across Canadian provinces, 299 across many countries, 297–299 across two millennia, 295–297 aggregate production function, 300–301 average economic growth, 1995–2005t, 224t in Canada, 8, 8t capital accumulation, 14 China, 13–14, 13t, 341–343, 343t, 345 euro area, 9–11, 11t facts of growth, 340–343 France, post-war, 313 GDP growth, 24 and institutions, 345–346 in labour input to production in Canada, 354–359 model of endogenous growth, 325–326 in open economy, 368 property rights, 346 in rich countries, –291–295, 347–348 secrets of growth, 347–348 sources of, 14, 302–303 Stalinist growth, 314 sustained growth, 303 technological progress, 14, 331–337 and unemployment, 26f growth rate of output per worker, 314 growth theory, 299, 549 Gu, Wulong, 345n Guaranteed Income Supplement (GIS), 318 Gulf War, 119 H haircut, 528 Haiti, 346 Hall, Robert, 553, 553f Hansen, Alvin, 81, 549 Hanson Lecture, 245, 496 happiness, 29, 296–297 Harper, Stephen, 135, 318, 484, 485, 539 hedonic pricing, 24 Hicks, John, 81, 549 high-powered money, 74 hires, 165 Historical Statistics of Canada, 17 Holland, 413 Holmström, Bengt, 557, 557f Hong Kong, 298, 301, 511 hostage takings and negotiations, 478–479 housing prices, 3, 211–212, 211f, 214, 215, 509, 510, 511 housing services, 41 housing wealth, 431 Howard, R., 493 Howitt, Peter, 556, 556f Hubbard, R Glenn, 441n human capital, 323–326, 326, 338 human capital accumulation, 324 Human Resources and Skills Development Canada (HRSDC), 359 human wealth, 431, 449 Hungary, 530 hybrid corn, 339 hyperinflation, 492, 530 I Iceland, 108 identity, 42 Igan, Deniz, 511n illegal transactions, 71, 118 illiquidity, 213 immigration, 356–359 Immigration and Refugee Protection Act, 359 imperfect capital mobility, 162 imports, 42 demand for domestic goods, 126–127 determinants of, 126–127 marginal propensity to import, 133 as ratio of GDP in Canada, 1961–2012, 108f technology, 366–368 income, 59 capital income, 21 change in ratio of money to income and interest rate changes, 1976–2012, 62–63, 63f current income, and consumption, 432–433, 435 and demand, 49 disposable income, 43, 44, 44f and gross domestic product (GDP), 21–22 increase in, and interest rate, 87f investment income, 117 labour income, 21 nominal income See nominal income permanent income, 430 real income, and LM relation, 86 income taxes, 44 index numbers, 26, 27 indexation clauses, 238 indexed bonds, 401, 494 India, 292 indifference curves, 450, 450f, 451f indirect taxes, 21 industrial policy, 347 Industrial Revolution, 323 inflation, 26, 230–231 accounting, and measurement of deficits, 519, 520f aggregate demand relation, 249 aggregate supply and expected inflation, 266, 266f benefits of, 494–496 in Canada, 259t, 506f and central bank independence, 480–481, 481f change in inflation vs unemployment, 1970–2012, 234f core inflation, 506 costs of inflation, 492–494 differences and nominal exchange rate change, 270f expected inflation, 230–231, 479 hyperinflation, 492, 530 inflation target, 497, 498t and life satisfaction, 30f medium run, 250–251, 251f, 255 as monetary phenomenon, 237, 251 and money growth, 499–501, 500f money illusion, 493, 494, 495–496 and natural rate of unemployment, 236–237 negative inflation, negative real interest rates, 495 and nominal and real interest rates, 382f and nominal interest rates, 388–395 nonaccelerating inflation rate of unemployment (NAIRU), 236 and one-to-three-year yield, 1950–2012, 395f optimal inflation rate, 492–499 “perfect path,” 497 and Phillips curve, 237–238 and real interest rates, 388–395 to reduce high levels of debt, 531 shoe-leather costs, 492 target path of, 253 target ranges for, 506–507 tax distortions, 492–493 and transparency, 483f and unemployment, 28–29, 249, 479–480 variability, 493–494 zero inflation, 265, 479, 496 inflation-adjusted deficit, 518 inflation rate, 26–29, 502 in Canada, 8, 8t, 28f, 230f, 232f in China, 13, 13t euro area, 11, 11t swings, 530–531 and unemployment rate, 1976–2012, 28f inflation target, 497, 497, 498t, 499 inflation targeting, 501–502 infrastructure, 540 institutions and growth, 345–346 North and South Korea, 347 integration, 556 interest parity condition, 119, 146, 147, 150 interest part, 150 interest-paying assets, 118 interest rate and bond prices, 66–67 on bonds, 60 budget deficit, and output, 197–199, 198f change in ratio of money to income and interest rate changes, 1976–2012, 62–63, 63f constant interest rates, 385 constant interest rates and payments, 385–386 constant interest rates and payments, going on forever, 386 determination of, 63–75, 65f, 73f, 150 domestic interest rate, 277 during economic crisis, 5f equilibrium interest rate, 63–65 and equilibrium output, 389f, 390 and exchange rate, 120–121, 149, 150f and fixed exchange rates, 161–162 income, increase in, 87f increase in, and output, 83, 83f IS-LM model, 89–92, 93 IS relation, 82, 388, 460–461 Japan, 219f lending rate, 394 and liquidity trap, 205, 207 LM relation, 86, 388, 460–461 monetary expansion, dynamic effect of, 193–194, 194f monetary policy, effects of, 421–423, 422f and money demand, 61–63 money supply, increase in, 65, 66f nominal income, increase in, 64–65, 65f nominal interest rates See nominal interest rates in open economy with fixed exchange rates, 272 overnight interest rate, 74 ratio of money to nominal income and interest rate, 1975–2012, 62, 62f real interest rates See real interest rates reduction, as response to crisis, 4–5 rules, 502–503 short-term interest rate, 67, 121 T-bill rates, 379, 381f, 406 target interest rate See target interest rate term structure of interest rates, 400 United States, 2006–2011, 216f zero interest rates, 386–387 interest rate differential, 277, 419–420 intermediate good, 21 international borrowing, 370–374 International Monetary Fund (IMF), 3, 18, 134, 140, 468, 517 international portfolio, 362–364, 363t, 364f inventories, 46 inventory investment, 42 investment, 41 Canada’s international portfolio, 362–364, 363t, 364f and capital accumulation, 310 corporate investment and profits in Canada, 439f current vs expected profits, 439–440 and deficit reduction, 92 demand for goods, 46 determinants of, 126 direct investment abroad, 362–363 economic meaning of, 41 and expectations, 435–442 expected profits, 435–437, 439–440 financial investment, 59 foreign direct investment, 363 foreign portfolio investment, 363–364 inventory investment, 42 and IS relation, 82 net international investment position, 364 new housing, 442–443 nonresidential investment, 41, 98 open economy, 360 and output, 309–310 per worker, 311 physical investment, 371–373, 372f profit and sales, 440–442 rates, net of depreciation, 324 and ratio of profit to user cost, 439 residential investment, 41 and saving, 53–54 and the stock market, 438 theories of, 549 volatility of, 443–444, 445f without international borrowing, 372t investment income, 117 Ireland, 12, 467–468 irrational exuberance, 98, 412 IS curve, 82–84 demand, 83 derivation, 84f downward-sloping, 84 expectations, 458, 458f, 461, 461f output, 83 shifts in, 85, 85f, 92 taxes, increase in, 90, 91f IS-LM model, 89f, 549 see also IS relation; LM relation activity, 89–92, 93 and the economy, 101–103 empirical representation, in Canadian economy, 101, 102–103f exercises, 88–93 expectations and decisions, 457–460 fiscal policy, 89–92 goods market and IS relation, 82–85 interest rate, 89–92, 93 “Life among the Econ,” 90 and liquidity trap, 205–208, 205f, 207f, 208f monetary policy, 93 and nominal interest rates, 387–388 open economy, 151, 152f output, interest rate, and exchange rate, 150–151 policy mix, 95 and real interest rates, 387–388 from 1950s to 1970s, 90 U.S economy, 2000 to 2012, 98–100 IS relation, 54 see also IS-LM model and expectations, 457–459 and goods market, 82–85 interest rate, 82, 388, 460–461 and investment, 82 IS curve See IS curve open economy, 126–128, 151 and sales, 82 taxes, 90 Israel, 501, 530 Italy, 12, 280 coordination, 134 cyclically adjusted budget balance (CABB), 527 debt-to-GDP ratio, 523 default risk, and interest rates, 528 retail sales, 443 INDEX I5 www.downloadslide.net J J-curve, 138–140, 139, 139f Japan annual rates of growth and technological progress, 341t bilateral real exchange rate, 115 coordination, 134 deflation, 275n, 499 export ratios, 108, 109t government spending and revenues, 219f inflation, interest rate, 219f liquidity trap and fiscal policy, 218–219 output per capita, 291, 294 quantitative easing, 509 research and development (R&D), 337, 338 savings rate, 308 stock market, 218 stock prices, 412, 413 Johnson, David, 260, 260f Jones, Stephen R.G., 166 Jorgenson, Dale, 549 junior securities, 214 junk bonds, 401 K Kartashova, Katya, 434, 434n Kenya, 345, 500 Keynes, John Maynard, 53, 81, 206, 276, 277, 463, 548, 548f Keynesians, 549–550 Klein, Lawrence, 549, 549f Koustas, Zisimos, 196 Krugman, Paul, 314, 497 Kuwait, 119, 364, 370, 371, 374, 419 Kuznets, Simon, 20 Kydland, Finn, 552 L labour augmenting, 331n labour demand, 182–183 labour force, 25, 165, 308, 357 Labour Force Survey (LFS), 25, 166, 167, 355, 430 labour hoarding, 247 labour in efficiency units, 332 labour income, 21 labour market, 164, 165–168 differences across workers, 167–168 dual labour market, 168 effective labour, 332, 335 growth in labour input to production in Canada, 354–359 labour demand, 182–183 labour in efficiency units, 332 labour supply, 182–183 large flows of workers, 165–167, 166f movements in unemployment, 168–171 natural rate of unemployment See natural rate of unemployment out of the labour force, 248 price determination, 174–175 primary labour market, 168 relative wages as weights, 324n secondary labour market, 168 small differences that matter, 240 wage determination, 171–174 labour market institutions, 11 Labour Market Opinion, 358–359 labour market rigidities, 11 labour productivity, 174, 344–345, 344t, 351 labour supply, 182–183 Lamont, Owen, 441n Latin America, 394 layoffs, 166 Lee, Frank C., 299 Lehman Brothers, 3, 44 Leijonhufvud, Axel, 90 I6 INDEX lending rate, 394 Lerner, Abba, 136 level of output per worker, 314 leverage, 213–214, 510 leverage ratio, 213 Liberal government, 94–95, 484, 535–538, 537t Libor rate, 215 “Life among the Econ” (Leijonhufvud), 90 life cycle theory of consumption, 430 life satisfaction, 29, 29f, 30f, 296 linear relation, 43 liquid, 500 liquidity, 64, 215 liquidity-constrained consumer, 454 liquidity facilities, 220, 464 liquidity preference, 548 liquidity trap, 204 and adjustment failure, 209 aggregate demand, shift in, 205f amplification mechanisms, 215–217 banks, role of, 212–213 complexity, 214–215 and expectations, 464 and fiscal policy, 217–218, 217f housing prices, 211–212, 211f IS-LM model, 205–208, 205f, 207f, 208f Japan, 218–219 leverage, 213–214 LM curve, 206–207, 207f and monetary policy, 205–208, 508–509 and money demand, 205, 206f and money supply, 206, 206f policy choices, 217–220 and risk of deflation, 208–209 subprime mortgages, 211–212 United States, 209–217, 406 LM curve, 86–87 derivation, 87f expectations, 461, 461f liquidity trap, 206–207, 207f monetary contraction, 153 shifts in, 88, 88f, 92 taxes, increase in, 91, 91f LM relation, 64 see also IS-LM model closed economy, 151 and expectations, 459–460 and financial markets, 85–86 fiscal policy with interest rate target, 97–98 interest rate, 86, 388, 460–461 LM curve See LM curve monetary policy with interest rate target, 96–97 money, 93 open economy, 151 and real income, 86 and real money, 86 target interest rate, 96–98, 96f loan-to-value ratio (LTV), 510, 511 logarithmic scale, 291, 336 long run, 31 capital accumulation, 323–326 deficit reduction, 462, 466 growth, 290 see also growth inflation and money growth, 499 interactions between output and capital, 308–310 open economy, 354–368 output and price level, 192 saving, 53, 310–323 technological progress See technological progress long-run real exchange rate, 419 long-term bonds, 401 long-term real interest ate, 460 Lucas, Robert, 256, 325, 463, 551, 551f, 552, 554, 555 Lucas critique, 256 Luxembourg, 492 M M1+, 62 M2, 501 M2+, 501 M1+ (gross), 500 M2+ (gross), 500, 501 Maastricht treaty, 283, 486 Macklem, Tiff, 433 macro-prudential tools, 509–511, 510, 557 macroeconometric models, 475–476, 549 macroeconomic policy, 29–30 balanced-budget law, 485–487 banking collapse, 217–220 in banking crisis, 220 and the business cycle in AS-AD model, 199–200 and expectations, 478–482 games between policy makers, 485 games between policy makers and voters, 483–484 in liquidity trap, 217–220 policy mix, 95 political business cycle, 484–485 and politics, 483–488 restraints, 477–478, 482 role of, 550–551 self-restraint, 478 theory of policy, 553 time inconsistency, 482 and uncertainty, 475–478 world economic crisis, Canada’s policy response to, 200–201 macroeconomic variables in Canada, 155t gross domestic product See gross domestic product (GDP) inflation rate, 26–29 selected, Canada, 94t unemployment rate, 24–26 macroeconomics after the crisis, 556–558 developments up to 2009 crisis, 554–556 integration, 556 Keynes and the Great Depression, 548 Keynesians vs monetarists, 549–550 monetary policy vs fiscal policy, 550 neoclassical synthesis, 548–551 new classical economics, 554 new growth theory, 555–556 new Keynesian economics, 554–555 policy, role of, 550–551 rational expectations critique, 551–553 real business cycle theory, 554 Maddison, Angus, 18 Malthus, Thomas Robert, 297 Malthusian era, 297 Mankiw, N Gregory, 555 marginal propensity to consume, 43 marginal propensity to import, 133 market for overnight funds, 74 Marshall, Alfred, 136 Marshall-Lerner condition, 136, 139, 143 Martin, Paul, 94, 95, 434, 493, 497, 535, 536 Martin-Thiessen policy mix, 94–95 maturity, 400 Mavrody, Sergei, 413 MBS, 70, 214 McCandless, George, 196, 196n medium run, 31, 164 AS-AD model See AS-AD model deficit reduction, 462, 465–466 equilibrium output, 189–192 exchange rates See exchange rates in medium run expected inflation, 230–231 Fisher hypothesis, 394 fixed nominal exchange rate, 274–275 full employment open economy with positive inflation, 268–271 inflation, 230–231, 250–251, 251f, 255, 492 inflation and money growth, 499 inflation target, 501 labour market See labour market liquidity traps See liquidity trap money growth, 255 natural rate of unemployment, 236–237 neutrality of money, 195 nominal interest rates, 391–393, 394 output, determination of, 290 output, movements in, 179–180 output and price level, 192 output growth, 250–251, 255 Phillips curve, 231–236 real interest rates, 391–393 saving, 53 vs short run, 199 supply shocks, 220–224 unemployment, 230–231, 250–251, 251f unemployment rate, 255 medium-term bonds, 401 Menem, Carlos, 285 Mennonite Central Committee, 117, 360 menu cost, 555 merchandise trade, 114, 115t Mexico, 137, 394 Miron, Jeffrey, 443 Mishkin, Frederic, 196 MMM pyramid, 413 model of endogenous growth, 325–326 modified Phillips curve, 234 Modigliani, Franco, 430, 478, 549, 549f Monaco, 264 monetarists, 550 monetary aggregates, 500–501 monetary base, 74, 161n, 162 monetary contraction, 93, 153–154, 154f monetary expansion, 93, 93f, 95f behind the scene, 193–194 dynamics of adjustment, 193, 193f, 194f effects of, 193–195 neutrality of money, 195 output, dynamic effect on, 193–194, 194f and the stock market, 409–410, 410f monetary-fiscal policy mix, 95 A Monetary History of the United States (Friedman and Schwartz), 550 monetary policy, 491–492 see also Bank of Canada; macroeconomic policy and AS-AD model, 199–200 challenges from crisis, 508–511 contractionary monetary policy, 96–97 design of, 499–503 effects of, 94t and exchange rate, 421–423, 422f, 507–508 expansionary monetary policy, 405, 461f and expectations, 423, 460–462 vs fiscal policy, 550 under fixed exchange rates, 156–157 and inflation, 1988–1993, 259f inflation target, 497 inflation targeting, 501–502 instruments of, 504–505 interest rate, effect on, 421–423, 422f interest rate reduction, 200–201 interest rate rules, 502–503 with interest rate target, 96–97 IS-LM model, 93 liquidity trap, and limits of monetary policy, 205–208, 508–509 macro-prudential tools, 509–511, 510 money growth and inflation, 499–501 open economy, 153–154 open economy with flexible exchange rates, 421–423 and open market operations, 66–68 optimal inflation rate, 492–499 www.downloadslide.net policy mix, 95 quantitative easing, 464, 509 response to crisis, 4–5 and uncertainty, 475–478 unconventional policies, 464 and unemployment, 11 Monetary Policy Report, 17 monetary tightening, 93 money, 59, 62 anticipated money, 196 vs bonds, 146 broad money, 501 change in ratio of money to income and interest rate changes, 1976–2012, 62–63, 63f changes in level of money, 251 creation, and inflation, 495 in currency, 64 as currency and chequable deposits, 73f dead money, 441 growth See money growth high-powered money, 74 in LM relation, 93 M1+, 62 neutrality of money, 195 opportunity cost of holding money, 388 ratio of money to nominal income and interest rate, 1975–2012, 62, 62f real effects of money, 195–196 real money, and LM relation, 86 unanticipated money, 196 velocity of money, 62 money demand, 61f central bank money, 69–71, 71f decisions involved, 71–72 equilibrium and, 74 and equilibrium interest rate, 63–65 and interest rate, 61–63 and liquidity trap, 205, 206f nominal money, demand for, 187 real money demand, 86 shifts in, 500 theories of, 549 money finance, 529–531 money growth adjusted nominal money growth, 251 and aggregate demand relation, 249 and inflation, 499–501, 500f medium run, 255 and natural rate of unemployment, 236–237 and nominal interest rates, 388–395, 393f nominal money growth, 254 and real interest rates, 388–395, 393f required path of, 253–255 short-run effects of increase in, 390f money growth rate, 237 money illusion, 493, 494, 495–496 money market funds, 60, 500 money multiplier, 74, 75 money supply and bond purchases, 75 central bank money, 69–71, 71f equilibrium and, 74 and equilibrium interest rate, 63–65 increase in, and interest rate, 65, 66f increase in, and LM curve, 88 and liquidity trap, 206, 206f monetary contraction, 93 monetary expansion, 93, 93f, 95f real money supply, 86 and target interest rate announcement, 75–76 Monitoring the World Economy (Maddison), 18 Moody’s Investors Service, 401 Mortensen, Dale, 555 mortgage-backed securities (MBS), 70, 214 mortgage lenders, 212 mortgage lending, 510 MPS model, 549, 552 Mulroney, Brian, 485 multifactor productivity growth, 351–352, 351f multilateral real exchange rate, 115 multiplier, 48, 75 Canada vs the United States, 133 smaller than 2.5, 50 multiplier effect, 48 Mundell, Robert, 144, 281–282 Mundell-Fleming model, 144 N n-year interest rate, 403–404 National Balance Sheets, 436 National Bureau of Economic Research (NBER), 98 national income accounts, 20 national income and expenditure accounts, 20 National Income and Product Accounts, 549 National Income and Product Accounts of the United States, 17 natural experiments, 433–434 natural level of employment, 178, 182f natural level of output, 179 natural population growth, 355–356 natural rate of unemployment, 164, 177, 479 Canada vs United States, 239 from employment to output, 179 equilibrium real wages and unemployment, 176–178 and Great Depression, 239 and inflation, 236–237 limits of our understanding, 241 and markups, 178f and money growth, 236–237 oil prices, effect of, 222, 222f Phillips curve, 235–236 price-setting relation, 175–176, 176f and unemployment benefits, 177f from unemployment to employment, 178 variations over time, 239–241 wage-setting relation, 175, 176f natural real interest rate, 391, 495 negative real interest rates, 495 negotiations, and hostage takings, 478–479 neoclassical synthesis, 548–551 net capital flow, 117 net exports, 42, 128, 128f, 129f and output, 128, 136 real exchange rate and ratio of net exports to GDP in Canada, 1970–2012, 141f net immigration, 356, 357–359 net international investment position, 364 net transfers paid, 117 Netherlands, 11–12, 511 neutrality of money, 195 new capital goods, 41 new classicals, 554 new growth theory, 555–556 new housing, 442–443 new Keynesian model, 556 new Keynesians, 554–555 New Zealand, 481, 501, 531 Niger, 298 Nikkei index, 218, 407 Nobel Prize, 20 nominal appreciations, 110 nominal contracts, 257–258 nominal depreciations, 110 nominal exchange rates, 109–111, 110, 110f, 111f, 114f, 265–271, 270f nominal GDP, 22–24, 23f nominal income, 60 increase in, and interest rate, 64–65, 65f ratio of money to nominal income and interest rate, 1975–2012, 62, 62f nominal interest rates, 121, 122f, 379, 379f, 381–383, 382f adjustment to increase in money growth, 393f in Canada since 1975, 381–383 current nominal interest rate, 460 and expected present discounted value, 387, 397–398 and inflation, 388–395, 393, 394 and IS-LM model, 387–388 in medium run, 391–393 and money growth, 388–395 in short run, 389–390, 392–393 from short run to medium run, 392–393 short-term nominal interest rate, 460 nominal money growth, 254 nominal payments, 397 nominal rigidities, 257–258, 555 nominal stock price, 409 nominal wage, 185, 479 nonaccelerating inflation rate of unemployment (NAIRU), 236 nongovernment bonds, 70 nongovernmental organizations (NGOs), 360 nonhuman wealth, 431, 449, 453, 453f nonresidential investment, 41, 98 normal growth rate, 247 North American Free Trade Agreement (NAFTA), 107 North Korea, 342, 347, 356 not in the labour force, 25 O Obama, Barack, 218 OECD See Organisation for Economic Co-operation and Development OECD Economic Outlook, 18 OECD Employment Outlook, 18 official international reserves, 362 oil price, 220–224, 221f, 222f, 223f Okun, Arthur, 25 Okun’s law, 25, 246–249, 248, 250, 254, 260, 477, 483 Old Age Security (OAS), 41, 318 Ontario, 484–485 OPEC (organization of the Petroleum Exporting Countries), 221 open economy accumulation of foreign debts, 360–362 AS-AD model, extension of, 187n combining exchange-rate and fiscal policies, 137 consumption choices, 360 decisions, 109 demand for domestic goods, 126–128 demand for domestic money, 146 depreciation, 136–137 domestic demand, increases in, 130 dynamics, 138–140 equilibrium output and the trade balance, 129, 129f equipping workers with capital, 359–366 fiscal policy, 152–153, 158 under fixed exchange rates, 273 with flexible exchange rates, 269t, 421–423 foreign demand, increases in, 130–132 full employment, 268–271 government spending, change in, 153 growth in, 368 investment choices, 360 IS-LM model, 151, 152f IS relation, 126–128, 151 J-curve, 138–140, 139, 139f LM relation, 151 monetary policy, effects of, 153–154 output, 135–137 policy, effects of, 152–154 population growth, 356 real exchange rate, 135–136 trade balance, 135–137 trade deficit, 130, 132 open market operations, 66–68, 74–75 contractionary open market operation, 67, 188 expansionary open market operation, 67 openness in factor markets, 107 openness in financial markets, 107, 115–121 balance of payments, 116–118 choice between domestic and foreign assets, 118–121 current account, 116–117 financial account, 117–118 openness in goods markets, 107, 108–115 choice between domestic and foreign goods, 109 nominal exchange rates, 109–111 real exchange rates, 111–115 optimal amount of foreign borrowing, 370–374 optimal control, 478, 552 optimal control theory, 478 optimal currency area, 282 optimal inflation rate, 492–499 benefits of inflation, 494–496 Canadian debate, 496–499 costs of inflation, 492–494 current debate, 496 Organisation for Economic Co-operation and Development, 17–18, 292 central bank independence, 480–481, 481f cyclically adjusted data, 527 debt-to-GDP ratio, 523–524 forecast for Canadian economic growth, 539 general government data, 517 growth rate of GD per capita, 298 inflation, 492, 492t literacy rate, 323 output per capita, 294 ratios of exports to GDP, selected OECD countries, 109t technological progress, 341 technology balance of payments, 366–367, 367t out of the labour force, 248 output see also production adjustment, time for, 51 autonomous spending, increase in, 49f budget deficit, and interest rate, 197–199, 198f capital, effects of, 308–309 and capital, interactions between, 308–310, 308f, 333–334 capital accumulation, effects on, 309–310 Cobb-Douglas production function, 328–329 and deficit reduction, 462–469 dynamics of capital and output, 310–312, 311f, 334–336, 334f dynamics of output and price level, 190–192, 191f from employment to output, 179 equilibrium output See equilibrium output and expectations, 460–469 expectations in current period, 466–469, 466f final output, 21 gross domestic product (GDP), 21–22 growth rate of, 303 growth rate of output per worker, 314 and human capital, 324 increase in, and price level, 185 interest rate, increase in, 83, 83f, 476f and investment, 309–310 IS curve, 83 INDEX I7 www.downloadslide.net output (continued) level of, and government, 54–55 level of output per worker, 314 monetary expansion, dynamic effect of, 193–194, 194f natural level of output, 179 and net exports, 128, 136 nominal money, increase in, 196t Okun’s law, 246–249 open economy, 135–137 per effective worker, 332, 332f, 333, 334–336, 334f, 336 per worker, 301, 302f, 312, 315f, 317, 333 and physical capital, 324 ratio of profit to capital and ratio to output to capital, 442f and saving rate, 313–316 stabilization, 524–527 and steady-state capital, 312–313 steady-state output, and saving rate, 320 technological progress, 333–336 world output growth since 2000, 3t output fluctuations, 199 output growth, 246–249 see also growth and aggregate demand relation, 249 and changes in unemployment rate, 246–247, 247f medium run, 250–251, 255 path of, 254 output per capita, 291–292, 292t, 293–295, 309 overnight interest rate, 74 overshooting, 423 overshooting model of exchange rates, 553 OXFAM, 360 P panel data sets, 430 Panel Study of Income Dynamics, 430 paradox of saving, 53 parameters, 43 participation rate, 25 patents, 340 pay-as-you-go, 318 payroll taxes, 44 pegs, 155–156 pension plan, 453n perfect capital mobility, 156, 161–162 “perfect path,” 497 permanent income theory of consumption, 430 personal computers, 24 Peru, 394 pharmaceutical firms, 363 Phelps, Edmund, 178, 235, 236, 236n, 550, 550f Phillips, A.W., 229, 231 Phillips curve, 29, 29, 229, 231–236, 246, 250, 550 accelerationist Phillips curve, 234 aggregate supply relation, 237, 244 and deflation, 238–239 early incarnation, 231 expectations and credibility, 256 expectations-augmented Phillips curve, 234 and inflation process, 237–238 modified Phillips curve, 234 mutations, 232–235 natural rate of unemployment, 235–236 and rational expectations, 552 unemployment, 253 unemployment and the change in inflation, 249 Phillips relation, 29 physical capital, 323–326 physical capital accumulation, 324 physical investment, 371–373, 372f Pissarides, Christopher, 555 I8 INDEX players, 478 point-year of excess unemployment, 252 policy See macroeconomic policy policy mix, 95 political business cycle, 483, 484–485 politics fixed election dates, 484–485 games between policy makers and voters, 483–484 and policy, 483–488 political business cycle, 484–485 Poloz, Stephen, 392 poor countries See development economics population emigration, 356–359 employment-to-population ratio, 354–355, 354f immigration, 356–359 natural population growth, 355–356 projected components of population growth in Canada, 357t sources of population growth in Canada, 356f Portugal, 12, 284, 487 postsecondary education, 324 Poterba, James, 434, 434n PPP GDP per capita, 345 prepaid cash cards, 64 Prescott, Edward, 552, 554, 554f present value, 385 see also expected present discounted value bond prices as present values, 400–402 of expected profits, 436–437 risk, accounting for, 427 of Social Security benefits, 433 stock prices, 408–409 price determination, 174–175 price indexes consumer price index (CPI), 27 GDP deflator, 26–27 index numbers, 26, 27 price level, 26 acceleration of, 234 consumer price index (CPI), 27 dynamics of output and price level, 190–192, 191f and equilibrium output, 189, 189f expected price level, 173 and expected price level, 231 GDP deflator, 26–27 higher expected level, and higher actual price level, 185 notation, 27 output, increase in, 185 “perfect path,” 497 and real interest rate, 381 price setting, 553 price-setting relation, 175–176, 176f, 182–183, 182f price signals, 530 pricing of computers, 24 hedonic pricing, 24 primary deficit, 518–519 primary income balance, 117 primary income paid, 116 primary income received, 116 primary labour market, 168 primary surplus, 518–519, 522 primes, 458 private saving, 53, 533 private spending, 457–458 Prodi, Romano, 487 production see also output growth in labour input to production in Canada, 354–359 plotting, as function of income, 48 production function, 174–175, 319n, 323–324 Cobb-Douglas production function, 328–329 expansion of, 317–319 and technological progress, 331–332 total employment, 354 profit corporate investment and profits in Canada, 439f current profit, 439–440 expected future profits, 439 expected present value of profits, 455 expected profits, 435–437, 439–440 per unit of capital, 441 ratio of profit to capital and ratio to output to capital, 442f ratio of profit to user cost, 439 riskless profit opportunities, 403 and sales, 440–442 profitability, 441 propagation mechanisms, 199 propensity to consume, 43 propensity to save, 54 property rights, 346 public saving, 54 purchasing power, 293 purchasing power parity (PPP), 12, 293, 294, 345 Q quantitative easing, 464, 509 Quantitative Easing I (QEI), 464 Quantitative Easing II (QEII), 464 Quebec, 485 Quebec Pension Plan (QPP), 44, 318 Quigley, John, 434, 434n quits, 166 quotas, 107 R Rabanal, Pau, 511n Raff, Daniel M.G., 172n random walk, 409 random walk of consumption, 553 rate of growth of labour productivity, 351 rate of growth of multifactor productivity, 351–352, 351f rating agencies, 215 rational expectations, 462, 463, 551–553 rational speculative bubble, 412–413, 427n Reagan administration, 434 real appreciation, 112, 113f real business cycle (RBC), 554 real depreciation, 112, 113f real exchange rate, 109, 111–115, 112f, 113f, 114f, 121, 135–136 adjustment of, 271–277 Canadian dollar from 1998 to 2012, 420–421, 421f and domestic and foreign real interest rates, 427–428 long-run real exchange rate, 419 and long-term real interest rates, 418–419, 421f in open economy with fixed exchange rates, 272 and ratio of net exports to GDP in Canada, 1970–2012, 141f and real interest rates, 416–418 trade and interest rate differentials, 419–420 real GDP, 22–24 in Canada, 23f, 52f, 291f chained vs nonchained measures, 37f construction of real GDP, 35–37 growth rate of U.S real GDP, 98f and technological progress, 24 real GDP in chained (2007) dollars, 23 real GDP per capita, 291f real interest-parity condition, 427–428 real interest rates, 379, 379f, 382f adjustment to increase in money growth, 393f in Canada since 1975, 381–383 computation of, 379–381 deflation, 382 domestic, and real exchange rate, 427–428 ex-ante real interest rate, 381 ex-post real interest rate, 381 and expected present discounted value, 387, 397–398 foreign, and real exchange rate, 427–428 and inflation, 388–395 and IS-LM model, 387–388 long-term, and real exchange rate, 418–419, 421f long-term real interest rate, 460 in medium run, 391–393 and money growth, 388–395 natural real interest rate, 391, 495 negative real interest rates, 495 and price level, 381 and real exchange rate, 416–418 realized real interest rate, 519 in short run, 389–390, 392–393 from short run to medium run, 392–393 real money demand, 86 real money supply, 86 real oil price, 221 real payments, 397 real return bonds, 401 real stock price, 409, 412 realignments, 278–279 realized real interest rate, 519 recessions, 24 in Canada, 52, 52t, 140, 405, 405f consumption and investment, 444 in euro area, 12 reference week, 167 relative wages, 324n rental cost of capital, 437 research and development (R&D), 337–340 reservation wage, 171 reserve ratio, 69 reserves, 68–69, 72, 73–74 residential housing markets, 414–416, 414f, 415f, 442–443, 443f residential investment, 41 retirement, 433–434 returns to factors, 300–301 returns to scale, 300–301 revaluations, 111, 155, 271 Ricardian equivalence, 533 Ricardo, David, 533 Ricardo-Barro proposition, 533 rich countries annual rates of growth and technological progress, 341t capital accumulation vs technological progress, 340–343 education, and growth, 344 growth in, 291–295, 347–348 Riddell, Craig W., 240n risk and bonds, 404 default risk, 400, 528 perceptions, 147 and present value formula, 427 risk averse, 385 risk neutral, 385 risk premium, 401, 404, 408n, 427 riskless arbitrage condition, 119n riskless profit opportunities, 403 “Robinson Crusoe” economy, 54 Roman Empire, 295–297 Romania, 14 Romer, Paul, 325, 555, 555f Roubini, Nouriel, 557 Ruggieri, C.G., 493 Russia, 293, 342, 413 coordination, 134 www.downloadslide.net S sacrifice ratio, 252–253, 260, 261 safe haven, 147 Saint-Paul, Gilles, 313n sales and IS relation, 82 and profit, 440–442 sample-selection bias, 357 Samuelson, Paul, 548, 548f San Marino, 264 Sargent, Thomas, 256, 463, 551, 551f saving, 54 and investment, 53–54 paradox of saving, 53 propensity to save, 54 saving behaviour, 309–310 saving rate, 303, 308 alternative saving rates, 310–317 consumption per worker in steady state, 317, 317f dynamic effects of increase in, 320–322, 321f effects of different saving rates, 314f golden-rule level of capital, 316–317, 322–323 increase of, and output per worker, 315f magnitude of effect of change in, 317–323 and output, 313–316 steady-state consumption, 322, 322t steady state of capital, 312–313, 322t steady-state output, effect on, 320, 322t and technological progress, 315, 315f, 336–337, 336f, 337f savings, 59 scatter diagrams, 25 Schaller, Huntley, 441, 441n Schumpeter, Joseph, 556 Schwartz, Anna, 550 Seasonal Agricultural Workers Program, 358 secondary income balance, 117 secondary labour market, 168 securitization, 214–215 seignorage, 495, 529–530 self-restraint, 478 semantic traps, 59 senior securities, 214 separations, 165 Serbia, 530 settlement balances, 504 shadow banking system, 214 shadow cost, 439 Shafir, Eldar, 494 shares, 407 inflation-induced capital gains, 493 value of, on Toronto Stock Exchange, 408f Shiefer, Andrei, 556, 556f Shiller, Robert, 434, 434n Shleifer, Andrei, 557 shocks, 199 see also supply shock shoe-leather costs, 492 Shooting the Hippo: Death by Deficit and Other Canadian Myths (McQuaig), 497 short run, 31, 164 deficit reduction, 462–463 demand See demand equilibrium in financial markets, 146–150 equilibrium in the goods market, 145 equilibrium output, 189–192 financial markets See financial markets fiscal policy, 533 fixed exchange rates, 155–158 fixed nominal exchange rate, 275 goods market See goods market inflation target, 501 IS-LM model See IS-LM model vs medium run, 199 nominal interest rates, 389–390, 392–393, 394 open economy, 126–140, 152–154 openness in financial markets, 107, 115–121 openness in goods markets, 107, 108–115 output, determination of, 290 output, movements in, 179 output and price level, 192 paradox of saving, 53 production See output; production real interest rates, 389–390, 392–393 short-term bonds, 401 short-term interest rate, 67, 121 short-term nominal interest rate, 460 Singapore, 298 SLID (Survey of Labour Income Dynamics), 430 slippery slope argument, 496 Small Differences That Matter (Card and Freeman), 240, 240n Social Science Research Council, 549 Solow, Robert, 300, 341, 351, 549, 549f Solow residual, 351–352 solvency, 213 South Korea, 298, 342, 347, 511 Soviet Union, 314, 342 Spain, 12, 280, 501, 511, 528 Stability and Growth Pact, 486–487 stagflation, 224, 551 staggering of wage decisions, 257, 553 Stalinist growth, 314 Standard and Poor’s Corporation (S&P), 401 Standard and Poor’s 500 Composite Index, 407 Standard and Poor’s/Toronto Stock Exchange Composite Index, 407 standard of living, 335 state of technology, 300, 331, 332 statistical discrepancy, 117 statistical studies, 357 statistics, 16–18 Statistics Canada, 17, 27, 36, 64, 248, 293, 344 steady state, 312–313, 335 steady-state consumption, 322, 322t steady-state output, 320 stock, 59 stock market Black October, 412 consumer spending, increase in, 410–411, 411f and economic activity, 409 and investment, 438 and monetary expansion, 409–410, 410f and movements in stock prices, 407–411 random walk, 409 stock price indexes, 407 stock prices, 281 and arbitrage, 426–427 and bubbles, 412–413 ex-dividend price, 408 and fads, 412–413 fundamental value, 412 graph, 2007–2010, 4f movements in, 407–411 nominal stock price, 409 as present values, 408–409 random walk, 409 real stock price, 409, 412 value of shares on Toronto Stock Exchange, 408f stocks, 42 Stone, Richard, 20 Storti, Claudia Costa, 196, 196n strategic interactions, 478 Strauss-Kahn, Dominique, 134–135 structural change, 174 structural deficit, 524 structural rate of unemployment, 178 structured investment vehicle, 214 sub-Saharan Africa, 299 subprime mortgages, 211–212, 212 subprimes, 212 sudden stops, 147 Summers, Lawrence H., 172n supply of central bank money, 69–71, 71f labour supply, 182–183 money See money supply reserves, 73–74 supply shock, 204, 220–224 surplus budget surplus, 54 primary surplus, 518, 522 Survey of Current Business, 17 Survey of Income and Program Participation, 433 Swan, Trevor, 300 Sweden, 280, 501 Switzerland, 508 T T-bill rates, 379, 381f, 406 T-bills, 66–67 Taiwan, 298 target for the overnight rate, 504, 505f target interest rate, 75–77, 96 announcement, and activity in central bank money market, 76–77 announcement of, and money supply, 75–76 fiscal policy, 97–98 government spending, increase in, 97f increase, effect of, 97f and LM relation, 96–98 and monetary policy, 96–97 tariffs, 107, 543 tax cuts, 434, 521f, 533 Tax-Free Savings Accounts, 542 taxes bracket creep, 493 capital gains, 492–493 current vs future taxes, 519–522 effective tax rate, 493 income taxes, 44 increase in, and IS curve, 90, 91f increase in, and LM curve, 91, 91f indirect taxes, 21 inflation, and tax distortions, 492–493 IS relation, 90 meaning of, 46 payroll taxes, 44 Taylor, John, 195, 257, 258, 502, 503, 553, 553f, 555 Taylor model, 196 Taylor rule, 502–503 technological catch-up, 343 technological frontier, 343 technological progress, 14, 302, 302f appropriability of research results, 339–340 vs capital accumulation, 340–343 China, 341–343 determinants of, 337–340 dynamics of capital and output, 334–336, 334f fertility of research, 338–339 and growth, 14 and growth rate, 331–337 human and physical capital accumulation, 326 measure of, 351–352 output and capital, interactions between, 333–334 patents, 340 and production function, 331–332 rate of growth of multifactor productivity, 351–352, 351f and real GDP, 24 research and development (R&D), 337–340 and saving rate, 315, 315f, 336–337, 336f, 337f Solow residual, 351–352 state of technology, 331, 332 and sustained growth, 303 technology gap, 348 technological regress, 554 technology import and export of, 366–368 policy implications of technology transfer, 367–368 technology balance of payments, 366–367, 367t technology gap, 348 TED spread, 215–216 temporary foreign workers, 358–359, 358f term structure of interest rates, 400 see also yield curve Thaler, Richard, 557 Theissen, Gordon, 95 time inconsistency, 340, 479, 482, 552 time indexes, 190 Tirole, Jean, 557, 557f Tobin, James, 549, 549f Tobin’s q, 438–439, 438f Tomlin, Ben, 434, 434n Toronto Stock Exchange, 408f total employment, 354 total wealth, 431 toxic assets, 215 trade, and real exchange rate, 419–420 trade balance, 42, 108, 129, 129f, 130 Canada, 139, 141f depreciation, 136–137 and output, 131–132 trade deficit, 42, 108, 130, 132, 138f trade surplus, 42, 108 trade-weighted real exchange rate, 115 traditional approach, 255 transfers to other levels of government, 537 transfers to persons, 537 transparency, 481–482, 483f Treasury bill rate, 62, 122f Treasury bills, 66–67 Troubled Asset Relief Program (TARP), 220 Tulipmania, 413 Turkey, 294, 492 Turkmenistan, 530 Tversky, Amos, 494 twin deficits, 532–534, 534f U unanticipated money, 196 uncertainty and actions of policy makers, 476–477 macroeconometric models, 475–476 and policy, 475–478 and restraints on policy makers, 477–478 uncovered interest parity relation, 119, 120 underwater mortgage, 212 unemployment, 230–231 see also unemployment rate and activity, 25 Canada, 30, 259t change in inflation vs unemployment, 1970–2012, 234f changes in, 246–249 cost of high unemployment, data, 25 decomposition of unemployment, 1976–2012, 170f discipline device, 177 and discouraged workers, 25 and disinflation, 255 duration of unemployment, 166, 170f, 252–253 equilibrium real wages, and unemployment, 176–178 and growth, 26f and inflation, 28–29, 249, 479–480 level of unemployment, 252–253 and life satisfaction, 29f looking for work, 25 INDEX I9 www.downloadslide.net unemployment (continued) medium run, 250–251, 251f and monetary policy, 11 movements in, 168–171 Okun’s law, 246–249 participation rate, 25 Phillips curve, 249, 253 point-year of excess unemployment, 252 under rational expectations, 553 reducing, in euro area, 11–12 required path of, 253 social implications, 26 structural rate of unemployment, 178 and those not in the labour force, 25 from unemployment to employment, 178 and wages, 173–174 without disinflation, 257f unemployment rate, 24–26, 230 see also unemployment aggregate unemployment rate, 169 and average duration of unemployment, 170f Canada, 230f, 232f, 233f, 241f in Canada, 8, 8t change in, vs GDP growth, 1982–2012, 26f change in, vs output growth, 246–247, 247f in China, 13, 13t defined, 246n equilibrium, 177 euro area, 9–11, 11t in Europe, 241, 242f and inflation rate, 1976–2012, 28f medium run, 255 movements in, 169f natural rate of unemployment See natural rate of unemployment nonaccelerating inflation rate of unemployment (NAIRU), 236 since 2000, 6f and wages, 173–174 UNICEF, 117, 360 United Kingdom annual rates of growth and technological progress, 341t bank runs, 71 bilateral real exchange rate, 115 central bank transparency, 481–482 consols, 386 coordination, 134 debt-to-GDP ratio, 531 I10 INDEX exchange rate mechanism, participation in, 280 export ratios, 108, 109t fiscal stimulus, 474 gold standard, 276 indexed bonds, 401 inflation targeting, 501 loan-to-value ratio, 511 monetary and macro-prudential tools, 510 output per capita, 291, 294 quantitative easing, 509 research and development (R&D), 338 United States, 7f, 8–9 American Recovery and Reinvestment Act, 218 annual consumption per capita, 293 annual rates of growth and technological progress, 341t bank runs, 71 banks, and reserve requirements, 69 bond ratings, 401 budget deficits, 5f, 6, 147 Bureau of Economic Analysis (BEA), 248 and Canadian exports, 140 consumption, 45f coordination, 134 debt-to-GDP ratio, 523–524 disposable income, 45f economic crisis, 3–5 economic statistics, 17 expansionary fiscal policy, 55 export ratios, 108, 109t exports, 127 federal funds rate, 2000–2012, 99f financial crisis, 209–217 financial market regulation, 510 fiscal stimulus, 474 GDP growth measures, release of, 248 GDP per capita, 292, 293 GDP per worker, 348 Great Depression, 210 growth rate of U.S real GDP, 98f health care in, housing prices, 211–212, 211f, 413 inflation targeting, 501 interest rates, 2006–2011, 216f and IS-LM model from 2000–2012, 98–100 labour market institutions, 11 labour productivity, 344–345, 344t liquidity trap, 209–217, 406 loan-to-value ratio, 511 multiplier, 133 natural rate of unemployment, 239 nominal interest rates, 121, 122f output per capita, 291, 294 political business cycle, 485 quantitative easing, 464, 509 recessionary-fighting policies, 100f research and development (R&D), 337, 338 residential housing market, 414–416, 414f, 415f revenues and spending (percent of GDP), 1998–2008, 100f as safe haven, 147 savings rate, 308 subprime mortgages, 211–212 TED spread, 216f Treasury bill rates, 122f Troubled Asset Relief Program (TARP), 220 unemployment rate, 241f unemployment rates since 2000, 6f yield curves, 406, 406f Uruguay, 295, 394 U.S Department of Commerce, Bureau of Economic Analysis, 17 U.S Government Printing Office, 17 user cost, 437, 439 V Van Wart, D., 493 velocity, 62 Venezuela, 295, 394 Venti, Steven, 434n very foresighted consumer, 430–431 vicious circle, 528 volatility of capital flows, in emerging countries, 148f consumption, 443–444, 445f investment, 443–444, 445f W wage indexation, 238 wage-price spiral, 231 wage setters, 175 wage-setting relation, 175, 176f, 182–183, 182f wages determination, 171–174 efficiency wages theories, 172–173 equilibrium real wages, and unemployment, 176–178 nominal wage, 185, 479 real wages, 173 relative wages, 324n reservation wage, 171 and unemployment, 173–174 and unemployment rate, 173–174 wage setting, 553 Wall Street Journal, 536 wars of attrition, 485 wealth, 59 and consumption choices, 449, 449f housing wealth, 431 human wealth, 431, 449 mean wealth in U.S., age 65–69, in 1991, 434t nonhuman wealth, 431, 449, 453, 453f total wealth, 431 Weber, Warren, 196, 196n weighted sum, 385 wholesale funding, 215 Wilkinson, Gordon, 260, 260f Wise, David, 434n Woodford, Michael, 556, 557, 557f World Bank, 140 world economic crisis, 3–7, 200–201 World Economic Outlook, 18 The World Economy: A Millennial Perspective (OECD), 18 The World Economy: Historical Statistics (OECD), 18 World Trade Organization (WTO), 367 World War I, 530 World War II, 20, 168, 313, 484, 530, 531 Y yield curve, 400–407 in Canada, 2013, 406, 406f Canadian yield curves, 400f and economic activity, 404–407 slope of, 404, 407 in United States, 2013, 406, 406f yield to maturity (yield), 400, 401, 403–404 Yu, Emily, 344, 345n Yugoslavia, 530 Z Zaire, 346 zero inflation, 265, 479, 496 Zero Inflation: The Goal of Price Stability (Lipsey), 496 zero interest rates, 386–387 Zimbabwe, 530 ... [EB] Library and Archives Canada Cataloguing in Publication Blanchard, Olivier (Olivier J.), author Macroeconomics / Olivier Blanchard, David Johnson Fifth Canadian edition Includes index ISBN... part of monetary policy in Canada and around the world His primary teaching area is macroeconomics He is coauthor with Olivier Blanchard of Macroeconomics the sixth U.S edition Professor Johnson... text Original edition published by Pearson Education, Inc., Upper Saddle River, New Jersey, USA Copyright © 2013 Pearson Education, Inc This edition is authorized for sale only in Canada If you