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Understanding Macroeconomic Stability

 

Originally posted as part of the Stabilization Macroeconomics series, the academic focussed publication sets the tone for the upcoming Macroeconomic Online Course on Stabilization. The series focuses more on the role of the Central Banks in driving monetary, fiscal, and macroeconomic policies of the government. The course begins with a look at Central Banks as enablers, its monetary focus on price stability introduces the concept of the trade-off between inflation and the unemployment rate. Includes discussion on the types of inflation variables used by selected Central Banks, along with a few key tools used for monetary policy. Open Market Operations is separately covered as a topic. Macroeconomics concepts like the Theory of Liquidity Preference, Phillips Curve, and Liquidity Trap are covered herein. The stabilization course mentions Taylor’s rule and Mankiw’s rule, a framework for setting up policy rates using inflation and GDP/ Unemployment rate as input variables but these concepts will be covered separately in upcoming sections on this macroeconomic series.

The first part of the series will look at different policy rates of selected central banks, mandates ranging from hierarchical to single with a focus on price stability and unemployment rate, and function as a lender of last resort. Under price stability, the key focus is given to inflation i.e. change of price levels over time (annually/ quarterly, monthly) as calculated through consumer price index or other measures of price indexes. The module series introduces the concept of the Phillips curve i.e. the negative relation between inflation and unemployment growth with an introduction to simple regression analysis. The series includes detailed examples of topics and add-on tutorials on Open Market Operations, Phillips Curve, and expected augmentation Phillips Curve. Since the 90s, Central Banks like Riksbank, the Central bank of Sweden, made inflation targeting their major monetary mandate. Founded in 1668, Riksbank is the oldest and one of the most prestigious central banks in the world. Fig 1 compares the price level and annual percent change in consumer prices. Post-1970, the slope of the rise in the price level is steep while the change in inflation rate stabilizes from the 1990s. Inflation is measured as a change in the consumer price index that can be computed in various ways. Macroeconomics concepts like the Theory of Liquidity Preference, Philips Curve, Liquidity Trap are covered herein. Module 8 mentions Taylors rule and Mankiw’s rule, a framework in setting up policy rates using inflation and GDP/ Unemployment rate as input variables but these concepts will be covered separately in upcoming sections on this macroeconomic series.

 

Fig 1 Sweden price level and change in percent inflation from 1830 to 2020 | The middle Road | Data source: scb.se

The first part of the series will look at different policy rates of selected central banks, mandates ranging from hierarchical to single with a focus on price stability and unemployment rate, function as a lender of last resort. Under price stability, the key focus is given to inflation i.e. change of price levels over time (annually/ quarterly, monthly)  as calculated through consumer price index or other measures of a consumer price index. The course series introduces the concept of the Phillips curve i.e. the negative relation between inflation and unemployment growth with an introduction to simple regression analysis. The series includes detailed examples of topics and add-on tutorials on Open Market Operations, Phillips Curve, and expected augmentation Phillips Curve.

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