Wallace Model Policy Ineffectiveness Proposition

Wallace Model Policy Ineffectiveness Proposition Critically discuss the following statement: â€Å"The Sargent and Wallace (1976) model of policy ineffectiveness has no basis in reality. It is of no practical or theoretical value to policymakers and economists alike.† The Sargent Wallace model (1976) produced the ‘Policy Ineffectiveness Proposition† which is viewed as a radical turning point for monetary theory and part of the ‘New Classical revolution that dominated policy during the 1970s and 1980s. Despite criticisms, it holds great significance as a benchmark model. The model is built upon the Lucas supply function: (1) yts = yn + (pt t-1 pte) + u t This stipulates the natural rate hypothesis that output can only deviate from its natural level by price forecasting errors or a random supply shock. The money supply rule is given by: mt = ÃŽ ± + ÃŽ ² (y* yt-1) + ÃŽ µt, Where ÃŽ ± is a constant term, ÃŽ ² is a parameter and y* is a target level of output. And ultimately, output in the model is given by: (3) y t S = y n + ÃŽ µt + ut It can be seen from (3) that the parameter set by anticipated monetary policy has no effect on the behaviour of output. Only the unanticipated money shock, ÃŽ µt , will have effect. The model is structured upon New Classical assumptions of rational expectations (RE), a Lucas supply curve and that only real variables matter. By substituting for more realistic assumptions, the policy ineffectiveness proposition would not hold. RE is defined below: t-1 Pt e = E (Pt / t-1) RE contrasted with the backward-looking expectations assumption of the adaptive expectations model that dominated previous theory. With RE, an activist policy would be predicted by agents who would then revise wage and price expectations upwards, resulting in unchanged real variables. There is no money illusion and agents do not make systematic mistakes. However empirical evidence suggests persistent expectational errors, seen by constant underestimation by agents of UK inflation (Carlson Parkin, 1975). Friedman used expectational errors to argue against the short-run neutrality of monetary policy. However RE is widely accepted, shown in the impact of inflation forecasting by the Bank of England has upon expectations and its use within the Efficient Market hypothesis. However the acceptance is seen as, â€Å"necessary but not sufficient† (Spencer, 2009) for the validation of the PIP, as models that are fully consistent with the rational expectations hypothesis with more realistic assumptions, have taken precedence. One such model, and a critic of the Friedman style ‘market-clearing assumption was Fischer (1977). He introduced short run wage rigidity, with agents making nominal contracts that lasted longer than one period. Monetary policy could change at higher frequencies than prices and wages, implying non-neutrality in the short run, Taylor proposed nominal rigidities in his model, with the inclusion of staggered wage contracts with similar results. The market clearing model seems distinct from reality, with real world lags. This assumption is credited by the Bank of England, who set a horizon for up to two years for achieving their inflation target and suggested adherence to a Taylor style rule. The Keynesian assumption is that the large unemployment seen throughout the world today is evidence that labour markets do not clear. The assumption of fully flexible prices is discredited by the Calvo model. Its inclusion of menu costs supports the fact that numerous imperfections within today s economy stop people reacting to news immediately. Hoover states if the symmetric information structure is removed, monetary policy does affect real variables. Grossman Stiglitz (1980) state that agents would not pay the cost to become informed as under rational expectations no profit could be made. This leaves policy-makers with an informational advantage and the ability to affect real variables. Support for symmetric information structures is seen via the UK, where transparency is vital, thus information differentials not persisting for long. In addition to invalid assumptions included within the model, it has been criticised for its exclusions. Econometric evidence suggests when assessing factors affecting output, exclusion of â€Å"monetary..policy would†¦create the greatest potential shortcoming† (Hutchinson Glick). Shammout argued the impact of monetary policy upon interest rates, exchange rates stock prices, instead of just prices, that can affect output. Money is seen as the only financial asset, excluding even government bonds. There is little evidence supporting its practical application, with early evidence by Barro (1977) deemed a â€Å"research failure†. Blanchard (2003) postulated the Mundell-Tobin effect of the ability of monetary policy to alter the natural rate of unemployment, with evidence in the evolution of European unemployment. Mishkin (1982) found both anticipated and unanticipated monetary policy has effect on real variables in the short run. The Quantitative Easing programme in the UK, seen to have helped unemployment, would be ineffective if the PIP held. Despite criticisms, its importance within monetary policy cannot be underestimated. The influential Barro-Gordon model (1977) supported the model with the assumption that whilst output and employment were affected by unanticipated monetary policy, anticipated policy would have no effect on real variables. The ‘Real Business Cycle model confirmed policy ineffectiveness in a world without the market-clearing assumption. It has promoted widespread use of the RE hypothesis, equilibrium modelling and cemented the need for firm microeconomic foundations in macroeconomic policies (Snowdon Vane). The New-Keynesian models are seen as emanating from the new classical challenge, in which Sargent Wallace played a key role. The Sargent Wallace model significantly impacted upon monetary policy, although not as its creators anticipated. Modern economists generally accepted the New Keynesian approach of the long run neutrality of monetary policy, and its short run potency due to real and nominal rigidities. Critics argue that the model presents a simplified static world, of complete certainty with no relevance in the real world. However in the light of theoretical application, â€Å"unrealistic assumptions are in fact necessary in the formation of a good theory† (Gilbert Miche) Thus although its modern practical use is negligible, its application within theoretical developments are vast. Bibliography: Books: Blanchard (2003), â€Å"Macroeconomics†, 3rd edition Heijdra (2003), â€Å"Foundations of Modern Macroeconomics† Hoover (1988), â€Å"The new classical macroeconomics: a sceptical inquiry† Romer (2001), â€Å"Advanced Macroeconomics† Snowdon Vane (2002), â€Å"Encyclopaedia of Macroeconomics† Articles: Barro, (1977), â€Å"Unanticipated Money Growth and Unemployment in the United States†, The American Economic Review Barro, (1978), â€Å"Unanticipated Money, Output, and the Price Level in the United States†, The Journal of Political Economy Calvo (1983), â€Å"Staggered prices in a utility-maximising framework†, Journal of Monetary Economics Carlson Parkin (1975), â€Å"Inflation expectations†, Economica Fischer (1977), â€Å"Long term contracts, Rational Expectations and the Optimal Money Supply Rule†, Journal of Political Economy Gilbert Michie (1997), â€Å"New Classical Macroeconomic Theory and Fiscal Rules: Some Methodological Problems†, Contributions to Political Economy Grossman Stiglitz (1980), â€Å"On the impossibility of Informationally Efficient Markets†, American Economic Review Hutchinson Glick (1990), â€Å"New results in support of the fiscal ineffectiveness proposition†, Journal of Money, Credit Banking Mishkin (1982) Does Anticipated Monetary Policy Matter? An Econometric Investigation, National Bureau of Economic Research Sargent Wallace (1976), Rational Expectations and the Theory of Economic Policy†, Journal of Monetary Economics Spencer (2009), â€Å"New Classical New Keynesian Economics I II† Websites: Shammout (1989), â€Å"Additional Econometric Tests of the Policy Ineffectiveness Proposition† accessed at http://etd.lib.ttu.edu/theses/available/etd-02262009-31295005775209/unrestricted/31295005775209.pdf on 21/11/2009

Injustices during the progressive Essay

During the late 1800’s and early 1900’s, there were a lot of injustices in the United States. The Progressive Movement, which began in the late 1800’s attempted to bring about government reforms and correct injustices in America. One example of the problem in the U.S. was over population of the American cities. More and more people began to move cities from rural areas for jobs. As you can see in Document I, the cities were overcrowded and the infrastructure could not hold up with the influx of people moving to urban areas. The people lived in overcrowded housing developments that were dirty and poor. There was also abuse in industries. This was exposed by Upton Sinclair (Document 2). One of his most well known novels was The Jungle, which showed the abuse in the meat packing industry. He uncovered how the people would take extremely spoiled meat and use it as sausage or put it in to a can. They also used all parts of the meat and even rats were found to be in the meat. By writing this book, Sinclair was able to expose the corruption in the industry of meat packing, and Congress passed the Meat Inspection Act. A position change brought about the declining numbers of children between the ages of ten and fifteen who worked. In Document 3, you can see by the chart that the number of children working decreased by 6.8% from 1890 to 1920. Children were often used as cheap labor and were abused greatly. The government was able to reduce the number of working children under sixteen during this period of time because many states passed children labor laws. Around this time, big businesses came to power. As shown in Document 4, there were many abuses in businesses. The people who ran and formed these industries/trusts/businesses, such as Andrew Carnegie, Rockefeller, and Henry Ford. They acted like the big bosses and held control of much of the U.S. industry. In Document 5, Teddy Roosevelt explained how he felt about how these big businesses (oil, steel, copper, etc.) should be regulated if they are only in it for the money and power. Teddy Roosevelt became known as  a â€Å"trust-buster† because he enforced the Sherman Antitrust Act. During the late 1800’s the Progressive Party was formed. They wanted to bring about change in the U.S. One of their main goals included the reforming of industries. In Document 6, their platform is partly shown. Under their platform, they wanted to prevent accidents, diseases acquired on the job, and unemployment. They further wanted to have better health and safety centers, and minimum wage. In 1913, the 17th Amendment was added to the Constitution (Document 7). When the Constitution was first written in 1787, the senators were elected by legislators. In order to make the selection of senators more democratic, the 17th amendment was added. It said that senators would be elected by people from each state, not by the legislature. This is why we now have candidates that campaign for seats in the senates to the people. By adding this amendment to the Constitution, it made the U.S. more democratic. Women suffrage also took place during this time. People like Susan B. Anthony (Document 8) and Elizabeth Cady Stanton worked and campaigned for women to be allowed to vote. Susan B. Anthony used the preamble of the Constitution to argue her case. She stated that the Constitution said â€Å"We the people†¦Ã¢â‚¬  not ‘We the men†¦'† She said the Constitution was written for all people, not just men. Her efforts eventually paid off, and the 19th amendment was passed in 1922 allowing women to work. In conclusion there were many injustices in the U.S. from the late 1800’s to the early 1900’s. The Progressive Movement help to bring about more change as did the government. Teddy Roosevelt tried the limit the abuses of big businesses, and women suffrage was granted, and the meat packing industry was exposed. With each time comes problems but with activists some are changed and reformed. During this time period, there were a lot of injustices and issues, many of which were discovered, addressed, and reformed.

Family Effects on Criminal Behavior Essay

It is rare for a person to see someone, who comes from a â€Å"good† family per say, to get into criminal behavior but it does happen. These people are brought up in this world with high standards and at some point they just can’t take it. They’re brought up with high expectations on them so when they can’t be met they find a way to cope. They turn to things, such as drug abuse, to make it through their situations. Others are just anti-social so they don’t know another way out but to turn to something that will accept them. Family has a major effect on what they’ll do. If they expect them how they are flaws and all they’re more likely to stay away from criminal behavior. But if they expect nothing but perfection and then are shunned on for not meeting those standards, they find a way to cope. They turn to things that you wouldn’t expect them to do. They’re brought up to high expectations. Then there’s people who aren’t brought up in a â€Å"good family† and don’t turn to the criminal behavior. These people are doing it for themselves. They saw what it was like to come from a â€Å"poor family† and don’t want to be that way the rest of their lives. They know what it’s like to live without the things they need and they want better for their future. They aren’t held to meet high expectations so any type of accomplishment they met is highly looked upon. But then there is the person who was brought up in a â€Å"good family† and isn’t looked upon as doing something so amazing. They just break at some point. But the ones who don’t come from a â€Å"good† family are given praise. People that come from a â€Å"good† family have more pressure on them to be a better person. They have high family values to meet. In Agnew’s Sources of Strain and Their Consequences it states one of the sources of strain is failure to achieve goals and one of the negative affective states could be anger or frustration. So then they turn to drug abuse or violence. But in some cases it’s not the family who has the effect on them. Because in the social learning theory it states that, people act aggressively because, as children, they modeled after the violent acts of adults. So when people are brought up in this world with those role models they try to be just like them. So a person’s acts aren’t only affected by their family. But their family does have a great deal on how they’ll be in the future. Though it is more likely for people that come from a disadvantaged family to turn to crime, there are always exceptions to everything. People can come from a good family and still turn to crime. They find a way to be individual, to stand out from the rest of the family. They want to have their own individuality and be paid attention to and if crime is the only way they are seen, the crime is what they will turn to. As for people who come from a poor family they may want to be able to give back to their family what they couldn’t be given. They strive to be different and stand out from the rest of their family. They too are looking for individuality.

The Evolution Of Western Civilization Essay - 795 Words

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