The Phillips Curve and a Soft Landing
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- เผยแพร่เมื่อ 14 ต.ค. 2024
- This is video shows how the short run Phillips curve is derived, how the long run Phillips curve is derived, why the short run Phillips Curve might be steep or flat, why the Phillips curve will shift, why the Phillips curve could be non-linear, and how the Phillips curve can be used to show how the Fed might be able to achieve a soft landing by reducing inflation without increasing the unemployment rate by very much.
Thank you so much for these MP updates, David!
Thomas,
You are very welcome! Thanks for watching!
Thank you for uploading this video! Now I am armed with better understanding of Phillips Curve when listening to tomorrow's FOMC press conference.
Given the detailed discussion on the impact of changes at the supply side to the PC, I have a question on the impact of changes at the demand side: could the composition of demand affect the slope of the PC?
Intuitively, if the commodities (whose production cannot be increased suddenly) take up the majority of what we consume, then high rate of employment would drive up the cost of commodities, leading to high inflation rate -- the PC is steep (strong unemployment/inflation tradeoff). On the other hand, if the services take up the majority of what we consume, as the supply of services at the margin is directly tied to the supply of labor at the margin (e.g. more supply of barbers, more affordable haircuts), high rate of employment (at the given service) would lead to low inflation rate, if not lower cost of that service (the PC is flat: weak unemployment/inflation tradeoff).
The pandemic suddenly shifted the composition of demand in the United States (and most developed economies) from services to goods. Could this shift led to the steeper PC, if we are to believe the observations of Crust et al. (2023) and Hobjin et al. (2023)?
Hyunjin,
You are very welcome! And thank you for the excellent question, to which the short answer is yes. The change in the composition of demand can impact the slope of both the AD and SRAS curves. And since the short run PC is derived from the AD and SRAS curves, changes in their slopes impact the slope of the short run PC. For example, if there is a change in consumption demand toward goods/services that are more price inelastic, the slope of the AD curve will become steeper as will the slope of the short run PC. What about the link between the composition of AD and the slope of the SRAS curve? That’s less obvious, but also important. Consider the early stages of the post pandemic rebound: thanks to the reopening of the economy, stimulus checks, expansionary monetary policy, etc, there was a large increase in the demand for goods as you have noted. Given the difficulty that firms had at finding labor and materials to build all these goods, the higher demand was very hard to meet. In other words, the SRAS got steeper-higher demand mostly pushed up inflation, and so the short run PC became steeper. I had debated including something about this concept in the video, but opted against it because it was already relatively lengthy.
@@bentleyuniversityec391mone6 Thank you for an enlightening answer! I wasn't aware that the slope of SRAS curve could be affected by the composition of AD.
You're very welcome. This usually happens in only the most extreme circumstances when the composition of AD changes a lot and does so quickly--think the pandemic example or perhaps a country going to war.
Hello professor, how are you?
I have a question that is not necessarily related to the video and I think you are one of the only ones who can explain to me the logic behind job openings.
I can't find a satisfactory explanation on Google and I don't understand whether an increase in jobs openings is good for the economy or whether a decrease (like now) is good for the economy.
I would be very grateful if you could please help me with this?
Thanks in advance
Good to hear from you. The answer to your question is..it depends. Suppose the economy is in a deep recession, like during 2008-09. Job openings plummeted because firms stopped hiring laid off lots of people. Ever so slowly, the economy recovered and began to expand. One of the main indicators of this expansion, especially in the early stages, was an increase in job openings as firms began to hire. So here, an increase in openings is good. Now let’s suppose that the economy is booming due to high aggregate demand, like in the bounce back from Covid. Firms would be trying to hire lots of workers and so openings would skyrocket. High aggregate demand, though, would generate high inflation. Here, high job openings would be correlated with inflation, so in a sense high job openings are not desired. To reduce inflation, the Fed would pursue a contractionary policy to reduce AD. If successful, job openings would fall, but hopefully not too much. The Fed is trying, in the verbiage they use, to bring supply and demand back into balance to reduce inflation pressures. So far, inflation and job openings have come down while having a modest slowdown in the labor market and the overall economy. To get inflation all the way down to 2% it’s possible that the costs to the economy will increase, but am not sure by how much.
@@bentleyuniversityec391mone6
Thank you very much from the bottom of my heart for the reasoned answer,
I wish you health and a peaceful weekend