Exploring mainly Heterodox type Economics, Monetary Reform, Environmental Sustainability, and Climate Change. It is a resource of Internet articles, and also promotes awareness of a futuristic modern universal Paradigm known as TFE, or Transfinancial Economics which is probably the most advanced, and most "scientific" form of Economics in the world .
Price regulations require retailers to follow certain rules, and the SOLUM digital labels’ capability to update prices in real-time helped comply with these regulations
When it comes to the world of retail, certain price regulations need to be met. Each country, city, or province usually has different laws and regulations about retail pricing. If retailers want to build an upstanding business while also staying competitive and earning the audience’s trust, complying with these price regulations should be a priority. This is why retailers need to look at their product pricing as well as the label industry to make sure they comply. Fortunately, retail technologies such as a digital label solution make it easier for retailers to adhere to any law or ordinance.
Examples of Price Regulation in Retail
Price regulation in retail can take various forms. They are often implemented by local and national governments to protect consumers, ensure fair consumption, and stabilize markets and communities.
Here are some examples of price regulation:
Minimum Pricing Laws: These laws set a minimum price below which certain goods cannot be sold. This is often used for products like alcohol or tobacco to discourage excessive consumption or prevent predatory pricing practices among other retailers.
Unit Pricing: Unit pricing regulations usually vary by country and state. However, this generally applies to goods being sold on a unit basis, for example, selling fruits by the pound. This requires stores to display and implement uniform pricing for all applicable products.
Price Controls: Governments may impose price controls to limit how much retailers can charge for certain goods or services. This can be temporary during emergencies or more permanent for essential items like utilities or basic food items.
Price Ceilings and Price Gouging: Price ceilings set a maximum price that can be charged for a product or service. These are often used to prevent price gouging during emergencies or to make essential goods more affordable. Price gouging occurs when retailers try to take advantage of growing demand. Price ceilings limit the chances of these situations.
Sale Advertisements: Some price regulations also refer to the way retailers advertise their products on sale. In some places, like Alaska, retailers are not allowed to advertise their products for sale or discount unless the product has a significant reduction in its original price. This particular price regulation in Alaska also covers the disclosing of sales periods and misleading general headlines for a “sale” in stores.
Price Floors: Conversely, price floors set a minimum price for certain goods or services. This is often used in agriculture to ensure farmers receive a fair price for their products.
Fair Trade Regulations: Fair trade regulations may establish minimum prices that producers receive for their goods. This helps ensure that they are not exploited by middlemen or large corporations.
Anti-Price Discrimination Laws: These laws prohibit retailers from charging different prices to different customers for the same product without valid reasons, such as quantity discounts or loyalty programs.
Loss Leader Laws: Some jurisdictions regulate the practice of selling goods below cost (known as loss leaders) to attract customers. This is because it can be seen as anti-competitive behavior that harms smaller or independent businesses.
Resale Price Maintenance: In some cases, manufacturers may attempt to control the resale price of their products by imposing minimum prices that retailers must charge. However, these practices are often subject to antitrust scrutiny.
Dynamic Pricing Regulations: Some jurisdictions regulate the use of dynamic pricing algorithms that adjust prices based on factors like demand, supply, or consumer behavior to prevent price discrimination or unfair pricing practices.
These are just a few examples of what and how price regulations can look like. Various countries and regions can have their local laws, economic conditions, and cultural factors. Retailers need to be aware of the regulations in their specific markets and locations, so that they may be able to take all the necessary steps for compliance.
Ways that a Digital Label Can Help Retailers Comply with Price Regulations
Retailers need to turn to the label industry and find a solution that would help display their prices and advertise their products in compliance with price regulations. A digital label can be a modern solution to this aspect of retailing. A digital label solution, or electronic shelf labels (ESL), offers several features that can help retailers comply with price regulations and laws more effectively.
The Newton ESL by SOLUM, in particular, is an ESL solution for various retail environments. One of its main advantages is the pricing display and updates. Retailers can use every digital label to show clear product prices and advertise sales or discounts appropriately. Not only that but as a whole solution, Newton ESL automates and streamlines retail operations to reduce time and effort from retail employees. With features and capabilities developed for price updates, retailers can have functional labels.
Here are a few ways that digital labels like the Newton ESL can help retailers with price regulation compliance.
#1 Digital label helps with real-time price updates
ESLs can be wirelessly connected to a central system or label management system, allowing retailers to update prices in real-time. This ensures that prices are accurate and up-to-date for every product offering. This minimizes the risk of non-compliance with regulations related to pricing accuracy.
#2 Digital labels have centralized control for the display
ESL systems typically include centralized management software that allows retailers to monitor and control pricing information across the whole store from a single interface. This centralized control makes it easier to enforce price regulations consistently and efficiently. Retailers will also be able to modify the content and display any prices, product information, or sale information.
#3 Digital labels can show audit trails and reporting
ESL systems may include features for tracking price changes and generating reports. Retailers can use this data to demonstrate compliance with pricing regulations, providing a clear audit trail that shows when prices were updated and ensuring transparency in pricing practices.
#4 Digital labels make way for dynamic pricing capabilities
Some ESL systems offer dynamic pricing capabilities, allowing retailers to adjust prices based on factors like demand, inventory levels, or competitor pricing. While dynamic pricing must still comply with regulations, ESLs can facilitate the implementation of dynamic pricing strategies while ensuring that prices remain within regulatory limits.
#5 Digital labels help with price verification and accuracy
ESLs can improve price verification and accuracy by displaying prices digitally. This reduces the likelihood of errors associated with manual price labeling or pricing discrepancies between the shelf and the point of sale system. This helps retailers comply with regulations related to pricing accuracy, prevent any confusion or altercation from consumers, and reduce the likelihood of potential fines or penalties for mispricing.
Moreover, this kind of accuracy from digital labels can also be applied to online inventory. Retailers can use digital labels to synchronize physical inventory and e-commerce prices. This would help retailers present the same prices across their selling channels more accurately. Consumers, in return, would have more trust and engagement with an omnichannel approach like this.
#6 Digital label helps with appropriate sales and marketing visuals
Digital labels can show more than just the price and the product name. Retailers can use the central label management system to add comprehensive product information as well as sales and discount information. This way, shoppers can see any crucial product information they need before buying. Retailers will also be able to show the significant price reduction that qualifies for a sale advertisement. Retailers can easily market their products appropriately with ESL to attract more consumers and build trust.
Overall, a digital label solution provides retailers with the tools and capabilities needed to manage pricing effectively while ensuring compliance with price regulations. Not only that, but it will also improve the audience’s shopping experience for the better.
Reasons to Comply with Price Regulation
Compliance with price regulations is essential for retailers for several reasons. Of course, this goes beyond any legal liabilities and might affect consumers and other vendors as well. It’s not only a legal requirement but also a strategic move for retailers to protect consumers, safeguard their reputation, and more.
Here are the crucial reasons to comply with price regulation:
Legal obligations and responsibilities
Consumer protection
Market stability
Business reputation
Reduction of financial losses
Competitive advantage
It’s time to take price regulations and price displays seriously. If you need a modern solution to help your business comply with rules and enhance your retail shelves, a digital label solution is the answer. Talk to SOLUM experts to learn more about Newton ESL!
The above invention referred to as Digital Labels is somewhat similiar to digital price controls in the emerging paradigm of Transfinancial_Economics.......
The following is a paper concerned with the possibility of recording (to a very limited extent) the economic data on inflation in Real-Time. In Transfinancial Economics it may well become possible to record changes in inflation to the "fullest possible" extent in Real-Time. http://www.p2pfoundation.net/Transfinancial_Economics..
TITLE OF PAPER
Nowcasting GDP and Inflation: The Real-Time
Informational Content of Macroeconomic Data Releases¤
Domenico Giannone, ECARES and European Central Bank,
Lucrezia Reichlin, European Central Bank and CEPR
David Small, Board of Governors, Federal Reserve
This version: September 2005
Introduction
Monetary policy decisions in real time are based on assessments of current and future
economic conditions using incomplete data. Since most data are released with a lag and
are subsequently revised, the reconstruction of current-quarter GDP, inflation and other
key variables is an important task for central banks and one to which they devote a
considerable amount of resources. Current-quarter numbers are also important because,
in the short-run, there is a greater degree of forecastability than in the long run. For
example, Giannone, Reichlin, and Sala (2004) (GRS from now on) document that, in
forecasting GDP beyond the ¯rst quarter, the forecasts of the Federal Reserve sta® and
of standard statistical models do not perform better than that of a constant growth
rate. Current-quarter estimates are particularly relevant because they are inputs for
model-based longer term forecasting exercises.
Nowcasts are constructed at central banks using both simple models and qualitative
judgment. Those exercises involve the analysis of a large amount of information and a
judgment on the relative weight to attribute to various data series. As new information
becomes available throughout the month, the nowcasts and forecasts may be adjusted in
response to changes in both the values of the data series and the implicit relative weights
applied to those series. Typically, central banks and markets pay particular attention
to certain data releases either because they arrive earlier, and can therefore convey
news on key variables such as GDP, or because they are inputs in their estimates (e.g.
industrial production or the Employment Report for GDP). In principle, however, any
release, no matter at what frequency, may potentially affect current-quarter estimates
and their precision. From the point of view of the short-term forecaster, there is no
reason to throw away any information.
This paper provides a framework that formalizes the updating of the nowcast and
forecast of output and in°ation as data are released throughout the month and that
can be used to evaluate the marginal impact of new data releases on the precision of the
now/forecast as well as the marginal contribution of different groups of variables. In
the empirics, we focus on the nowcast and we use intra-month releases of monthly time
series to construct (possibly) progressively more accurate current-quarter estimates.
Our approach allows us to consider a large number of monthly time series (in principle
all the potentially relevant ones) within the same forecasting model. Moreover, the
model takes into account the non-synchronicity of the releases by exploiting vintages
of panel data which are unbalanced at the end of the sample.
FOR MORE DETAILS OF THE ABOVE. READ LINK BELOW.
NEW DELHI: With inflation resurging as a headache after
(The PMO Is mulling such…)
NEW DELHI: With inflation resurging as a headache after the Wholesale Price Index (WPI) spiked to 6% in May, its highest level in five months, the Narendra Modi government is considering a proposal to create a real-time data monitoring system to keep track of food production, stocks and prices across the country.
The Prime Minister's Office (PMO) is mulling such a system as it could help coordinate more effectively with official agencies and state governments to try and balance supplies and moderate prices on a proactive basis.
Finance minister Arun Jaitley on Monday blamed hoarders and the poor monsoon for the spike in wholesale price inflation to over 6% in May, inviting criticism from the Congress which said the same arguments were made by UPA ministers to explain why inflation was difficult to tame. Inflation, along with corruption, was one of the biggest planks of the recent Lok Sabha campaign, with the BJP flagging the UPA government's inability to curb price rise over the past decade.
The Modi government has said "containing food inflation will be its top-most priority."
The prime minister has said it is time for tough decisions to revive the economy, but high inflation could limit the space for some of the difficult policy choices to be made such as rationalising subsidies. With wholesale prices touching a five-month high in May and a below-normal monsoon on the cards - a 'business-as-usual' approach may not be enough to tackle the price rise monster.
"Good timely data is critical for the government to mitigate food inflation and for that, a better price monitoring system is imperative. Though some agencies like the price monitoring unit in the consumer affairs ministry monitor prices on a daily basis, it only involves 22 commodities and the data is not robust," said a senior official aware of the development.
Under the present system, nine different official agencies, including the Intelligence Bureau (IB), track price data with each using a different methodology and reporting format.
The IB tracks retail prices, as does the price monitoring cell in the consumer affairs ministry and the directorate of economics and statistics (DES) in the department of agriculture and cooperation. The consumer affairs ministry cell tracks wholesale and retail prices of 22 essential food items, spot and future prices of eight commodities traded on the exchanges, and weekly mandi prices of 20 items. The DES in the agriculture ministry collects wholesale and retail prices along with production, area coverage and weather forecast on a weekly basis. It collects prices from state marketing boards with an intent to provide advance assessments regarding demand-supply gaps to the Centre. Besides, the DES also tracks farm gate prices, which do not include transport and storage costs and publishes them at an interval of three to four years. "Almost all the price data received by government suffers from a huge time lag. Though the price monitoring cell gets retail and wholesale prices on the same day, the data is often not accurate as states don't update their inputs in earnestness," the official said. Separately, the directorate of marketing and inspection under the same ministry collects wholesale prices of farm products on a daily basis, with prices uploaded online by APMCs.
Capturing price trends into a headline measure of inflation is done by three other departments. For instance, the WPI is generated by the economic adviser in the department of industrial policy and promotion. The index is used for macroeconomic policies and monetary policies.
To capture price movements at the ground level, which citizens are concerned about, the Labour Bureau under the labour and employment ministry, generates consumer price indices for industrial workers, farm and rural labourers, separately. The Central Statistical Organisation also compiles consumer price indices for urban and rural areas with the purpose of providing a general measure of inflation encompassing all sections of the population.
With Transfinancial Economics it would be possible to get a far more accurate understanding of Macroeconomics in Real-Time. This is revolutionary, and goes way beyond the limited claims of this Wikipedia article. http://www.p2pfoundation.net/Transfinancial_Economics RS
Macroeconomics (from the Greek prefix makro- meaning "large" and economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies.[1][2] With microeconomics, macroeconomics is one of the two most general fields in economics.
Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indexes to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets.
While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income). Macroeconomic models and their forecasts are used by governments to assist in the development and evaluation of economic policy.
Macroeconomics encompasses a variety of concepts and variables, but there are three central topics for macroeconomic research.[3] Macroeconomic theories usually relate the phenomena of output, unemployment, and inflation. Outside of macroeconomic theory, these topics are also important to all economic agents including workers, consumers, and producers.
National output is the total value of everything a country produces in a given time period. Everything that is produced and sold generates income. Therefore, output and income are usually considered equivalent and the two terms are often used interchangeably. Output can be measured as total income, or, it can be viewed from the production side and measured as the total value of final goods and services or the sum of all value added in the economy.[4]
Macroeconomic output is usually measured by Gross Domestic Product (GDP) or one of the other national accounts. Economists interested in long-run increases in output study economic growth. Advances in technology, accumulation of machinery and other capital, and better education and human capital all lead to increased economic output over time. However, output does not always increase consistently. Business cycles can cause short-term drops in output called recessions. Economists look for macroeconomic policies that prevent economies from slipping into recessions and that lead to faster long-term growth.
A chart using US data showing the relationship between economic growth and unemployment expressed by Okun's law. The relationship demonstrates cyclical unemployment. Economic growth leads to a lower unemployment rate.
The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labor force. The labor force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded from the labor force.
Unemployment can be generally broken down into several types that are related to different causes.
Classical unemployment occurs when wages are too high for employers to be willing to hire more workers.
Consistent with classical unemployment, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment.[5]
Structural unemployment covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs.[6] Large amounts of structural unemployment can occur when an economy is transitioning industries and workers find their previous set of skills are no longer in demand. Structural unemployment is similar to frictional unemployment since both reflect the problem of matching workers with job vacancies, but structural unemployment covers the time needed to acquire new skills not just the short term search process.[7]
While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates. Okun's law represents the empirical relationship between unemployment and economic growth.[8] The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment.[9]
The ten-year moving averages of changes in price level and growth in money supply (using the measure of M2, the supply of hard currency and money held in most types of bank accounts) in the US from 1875 to 2011. Over the long run, the two series show a close relationship.
A general price increase across the entire economy is called inflation. When prices decrease, there is deflation. Economists measure these changes in prices with price indexes. Inflation can occur when an economy becomes overheated and grows too quickly. Similarly, a declining economy can lead to deflation. Central bankers, who control a country's money supply, try to avoid changes in price level by using monetary policy. Raising interest rates or reducing the supply of money in an economy will reduce inflation. Inflation can lead to increased uncertainty and other negative consequences. Deflation can lower economic output. Central bankers try to stabilize prices to protect economies from the negative consequences of price changes.
Changes in price level may be result of several factors. The quantity theory of money holds that changes in price level are directly related to changes in the money supply. Most economists believe that this relationship explains long-run changes in the price level.[10] Short-run fluctuations may also be related to monetary factors, but changes in aggregate demand and aggregate supply can also influence price level. For example, a decrease in demand because of a recession can lead to lower price levels and deflation. A negative supply shock, like an oil crisis, lowers aggregate supply and can cause inflation.
The AD-AS model has become the standard textbook model for explaining the macroeconomy.[11] This model shows the price level and level of real output given the equilibrium in aggregate demand and aggregate supply. The aggregate demand curve's downward slope means that more output is demanded at lower price levels.[12] The downward slope is the result of three effects: the Pigou or real balance effect, which states that as real prices fall, real wealth increases, so consumers demand more goods; the Keynes or interest rate effect, which states that as prices fall the demand for money declines causing interest rates to decline and borrowing for investment and consumption to increase; and the net export effect, which states that as prices rise, domestic goods become comparatively more expensive to foreign consumers and thus exports decline.[12]
In the conventional Keynesian use of the AS-AD model, the aggregate supply curve is horizontal at low levels of output and becomes inelastic near the point of potential output, which corresponds with full employment.[11] Since the economy cannot produce beyond more than potential output, any AD expansion will lead to higher price levels instead of higher output.
A traditional AS–AD diagram showing an shift in AD and the AS curve becoming inelastic beyond potential output.
The AD–AS diagram can model a variety of macroeconomic phenomena including inflation. When demand for goods exceeds supply there is an inflationary gap where demand-pull inflation occurs and the AD curve shifts upward to a higher price level. When the economy faces higher costs, cost-push inflation occurs and the AS curve shifts upward to higher price levels.[13] The AS–AD diagram is also widely used as pedagogical tool to model the effects of various macroeconomic policies.[14]
The IS–LM model represents the equilibrium in interest rates and output given by the equilibrium in the goods and money markets.[15] The goods market is represented by the equilibrium in investment and saving (IS), and the money market is represented by the equilibrium between the money supply and liquidity preference.[16] The IS curve consists of the points where investment, given the interest rate, is equal to savings, given output.[17]
The IS curve is downward sloping because output and the interest rate have an inverse relationship in the goods market: As output increases more money is saved, which means interest rates must be lower to spur enough investment to match savings.[17] The LM curve is upward sloping because interest rates and output have a positive relationship in the money market. As output increases, the demand for money increases, and interest rates increase.[18]
In this example of an IS/LM chart, the IS curve moves to the right, causing higher interest rates (i) and expansion in the "real" economy (real GDP, or Y).
The IS/LM model is often used to demonstrate the effects of monetary and fiscal policy.[15] Textbooks frequently use the IS/LM model, but it does not feature the complexities of most modern macroeconomic models.[15] Nevertheless, these models still feature similar relationships to those in IS/LM.[15]
The neoclassical growth model of Robert Solow has become a common textbook model for explaining economic growth in the long-run. The model begins with a production function where national output is the product of two inputs: capital and labor. The Solow model assumes that labor and capital are used at constant rates without the fluctuations in unemployment and capital utilization commonly seen in business cycles.[19]
An increase in output, economic growth, can only occur because of an increase in the capital stock, a larger population, or technological advancements that lead to higher productivity (Total factor productivity). An increase in the savings rate leads to a temporary increase as the economy creates more capital, which adds to output. However, eventually the depreciation rate will limit the expansion of capital: Savings will be used up replacing depreciated capital, and no savings will remain to pay for an additional expansion in capital. Solow's model suggests that economic growth in terms of output per capita depends solely on technological advances that enhance productivity.[20]
In the 1980s and 1990s endogenous growth theory arose to challenge neoclassical growth theory. This group of models explains economic growth through other factors, like increasing returns to scale for capital and learning-by-doing, that are endogenously determined instead of the exogenous technological improvement used to explain growth in Solow's model.[21]
Typical intervention strategies under different conditions
Macroeconomic policy is usually implemented through two sets of tools: fiscal and monetary policy. Both forms of policy are used to stabilize the economy, which usually means boosting the economy to the level of GDP consistent with full employment.[22]
Central banks implement monetary policy by controlling the money supply through several mechanisms. Typically, central banks take action by issuing money to buy bonds (or other assets), which boosts the supply of money and lowers interest rates, or, in the case of contractionary monetary policy, banks sell bonds and takes money out of circulation. Usually policy is not implemented by directly targeting the supply of money.
Banks continuously shift the money supply to maintain a fixed interest rate target. Some banks allow the interest rate to fluctuate and focus on targeting inflation rates instead. Central banks generally try to achieve high output without letting loose monetary policy create large amounts of inflation.
Conventional monetary policy can be ineffective in situations such as a liquidity trap. When interest rates and inflation are near zero, the central bank cannot loosen monetary policy through conventional means. Central banks can use unconventional monetary policy such as quantitative easing to help increase output. Instead of buying government bonds, central banks implement quantitative easing by buying other assets such as corporate bonds, stocks, and other securities.
This allows lowers interest rates for broader class of assets beyond government bonds. In another example of unconventional monetary policy, the United States Federal Reserve recently made an attempt at such as policy with Operation Twist. Unable to lower current interest rates, the Federal Reserve lowered long-term interest rates by buying long-term bonds and selling short-term bonds to create a flat yield curve.
Fiscal policy is the use of government's revenue and expenditure as instruments to influence the economy. Examples of such tools are expenditure, taxes, debt.
For example, if the economy is producing less than potential output, government spending can be used to employ idle resources and boost output. Government spending does not have to make up for the entire output gap. There is a multiplier effect that boosts the impact of government spending. For example, when the government pays for a bridge, the project not only adds the value of the bridge to output, it also allows the bridge workers to increase their consumption and investment, which also help close the output gap.
The effects of fiscal policy can be limited by crowding out. When government takes on spending projects, it limits the amount of resources available for the private sector to use. Crowding out occurs when government spending simply replaces private sector output instead of adding additional output to the economy. Crowding out also occurs when government spending raises interest rates which limits investment. Defenders of fiscal stimulus argue that crowding out is not a concern when the economy is depressed, plenty of resources are left idle, and interest rates are low.
Fiscal policy can be implemented through automatic stabilizers. Automatic stabilizers do not suffer from the policy lags of discretionary fiscal policy. Automatic stabilizers use conventional fiscal mechanisms but take effect as soon as the economy takes a downturn: spending on unemployment benefits automatically increases when unemployment rises and, in a progressive income tax system, the effective tax rate automatically falls when incomes decline.
Economists usually favor monetary over fiscal policy because it has two major advantages. First, monetary policy is generally implemented by independent central banks instead of the political institutions that control fiscal policy. Independent central banks are less likely to make decisions based on political motives.[22] Second, monetary policy suffers shorter inside lags and outside lags than fiscal policy. Central banks can quickly make and implement decisions while discretionary fiscal policy may take time to pass and even longer to carry out.[22]
In the typical view of the quantity theory, money velocity (V) and the quantity of goods produced (Q) would be constant, so any increase in money supply (M) would lead to a direct increase in price level (P). The quantity theory of money was a central part of the classical theory of the economy that prevailed in the early twentieth century.
Macroeconomics, at least in its modern form,[24] began with the publication of John Maynard Keynes's General Theory of Employment, Interest and Money.[23][25] When the Great Depression struck, classical economists had difficulty explaining how goods could go unsold and workers could be left unemployed. In classical theory, prices and wages would drop until the market cleared, and all goods and labor were sold. Keynes offered a new theory of economics that explained why markets might not clear, which would evolve (later in the 20th century) into a group of macroeconomic schools of thought known as Keynesian economics – also called Keynesianism or Keynesian theory.
In Keynes's theory, the quantity theory broke down because people and businesses tend to hold on to their cash in tough economic times, a phenomenon he described in terms of liquidity preferences. Keynes also explained how the multiplier effect would magnify a small decrease in consumption or investment and cause declines throughout the economy. Keynes also noted the role uncertainty and animal spirits can play in the economy.[24]
The generation following Keynes combined the macroeconomics of the General Theory with neoclassical microeconomics to create the neoclassical synthesis. By the 1950s, most economists had accepted the synthesis view of the macro economy.[24] Economists like Paul Samuelson, Franco Modigliani, James Tobin, and Robert Solow developed formal Keynesian models, and contributed formal theories of consumption, investment, and money demand that fleshed out the Keynesian framework.[26]
Milton Friedman updated the quantity theory of money to include a role for money demand. He argued that the role of money in the economy was sufficient to explain the Great Depression and aggregate demand oriented explanations were not necessary. Friedman argued that monetary policy was more effective than fiscal policy; however, Friedman doubted the government has ability to "fine-tune" the economy with monetary policy. He generally favored a policy of steady growth in money supply instead of frequent intervention.[27]
Friedman also challenged the Phillips curve relationship between inflation and unemployment. Friedman and Edmund Phelps (who was not a monetarist) proposed an "augmented" version of the Phillips curve that excluded the possibility of a stable, long-run tradeoff between inflation and unemployment. When the oil shocks of the 1970s created a high unemployment and high inflation, Friedman and Phelps were vindicated. Monetarism was particularly influential in the early 1980s. Monetarism fell out of favor when central banks found it difficult to target money supply instead of interest rates as monetarists recommended. Monetarism also became politically unpopular when the central banks created recessions in order to slow inflation.
New classical macroeconomics further challenged the Keynesian school. A central development in new classical thought came when Robert Lucas introduced rational expectations to macroeconomics. Prior to Lucas, economists had generally used adaptive expectations where agents were assumed to look at the recent past to make expectations about the future. Under rational expectations, agents are assumed to be more sophisticated. A consumer will not simply assume a 2% inflation rate because that has been the average the past few years; she will look at current monetary policy and economic conditions to make an informed forecast. When new classical economists introduced rational expectations into their models, they showed that monetary policy could only have a limited impact.
Lucas also made an influential critique of Keynesian empirical models. He argued that forecasting models based on empirical relationships would keep producing the same predictions even as the underlying model generating the data changed. He advocated models based on fundamental economic theory that would, in principle, be structurally accurate as economies changed. Following Lucas's critique, new classical economists, led by Edward C. Prescott and Finn E. Kydland created real business cycle (RBC) models of the macroeconomy.[28]
RBC models were created by combining fundamental equations from neo-classical microeconomics. In order to generate macroeconomic fluctuations, RBC models explained recessions and unemployment with changes in technology instead changes in the markets for goods or money. Critics of RBC models argue that money clearly plays an important role in the economy, and the idea that technological regress can explain recent recessions is also implausible.[29] However, technological shocks are only the more prominent of a myriad of possible shocks to the system that can be modeled. Despite questions about the theory behind RBC models, they have clearly been influential in economic methodology.
New Keynesian economists responded to the new classical school by adopting rational expectations and focusing on developing micro-founded models that are immune to the Lucas critique. Stanley Fischer and John B. Taylor produced early work in this area by showing that monetary policy could be effective even in models with rational expectations when contracts locked-in wages for workers. Other new Keynesian economists expanded on this work and demonstrated other cases where inflexible prices and wages led to monetary and fiscal policy having real effects.
Like classical models, new classical models had assumed that prices would be able to adjust perfectly and monetary policy would only lead to price changes. New Keynesian models investigated sources of sticky prices and wages due to imperfect competition,[30] which would not adjust, allowing monetary policy to impact quantities instead of prices.
By the late 1990s economists had reached a rough consensus. The rigidities of new Keynesian theory were combined with rational expectations and the RBC methodology to produce dynamic stochastic general equilibrium (DSGE) models. The fusion of elements from different schools of thought has been dubbed the new neoclassical synthesis. These models are now used by many central banks and are a core part of contemporary macroeconomics.[31]
New Keynesian economics: which developed partly in response to new classical economics, strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management.
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