Managment Engineering - Macroeconomics of finance

Full exam

Macroeconomics of Finance, 1 0 September 2020 (Prof. A. Florio) Exercise 1 “In recent years, however, inflation has fallen pers istently short of the central bank’s target in many countries. In the immediate aftermath of the global financial crisis, such low inflation was no puzzle. Unemployment rose sharply, reaching 10% in America in October 2009.” (The Economist, 22 nd August 202 0) a) Why , in that occasion , “low inflation was no puzzle”? Comment carefully explaining the macroeconomic relationship behind such a statement. b) In the absence of any puzzle, the relationship is supposed to have a given slope “but central banks’ polici es tilt the other way”. Explain this sentence (think, for example, to the reaction by the central bank to a rise in inflation). The above article goes on describing the puzzle: “But after the recovery inflation continued to remain muted even as unemployme nt in America, the euro are and japan fell unusually far. That has forced economists to rethink the relationship.” And it adds: “inflation expectations can (…) explain part of the puzzle. They have been low for decades.” c) How would you expect the relationship to change if there is a reduction in inflation expectations? Provide a graphical analysis comparing the two curves and explain your answer. d) What happens to the relationship if inflation becomes less sensitive to unemployment? Provide a graphical analysis comparing the two curves and explain some reasons why this could happen. At the end of August, at the Jackson Hole’s symposium, Mr. Powell claimed: “ As the unemployment rate moved lower and inflation remained mu ted, estimates of u -star were revised down. ” e) Explain this statement. (What is u -star? Why was it revised down?) On that occasion Powell announced a revision of the Fed’s monetary policy procedure: “our revised statement says that our policy decision will be informed by our “assessments of the shortfalls of employment from its maximum level” rather than by “deviations from its maximum level” as in our previous statement. ” (Note that, he began the explanation for this change, s tating : “ In earlier decade s when the Phillips curve was steeper, inflation tended to rise noticeably in response to a strengthening labor market .” f) How would you explain the revised statement? A further change announced by Powell is the following: “ our new statement indicates tha t we will seek to achieve inflation that averages 2 percent over time. ” g) What is the difference with respect to the Fed’s previous goal? Explain the new goal. Exercise 2 Diamond (1984) claims “Diversification within the financial intermediary is the key to understanding why there is a benefit from delegating monitoring to an intermediary which is not monitored by its depositors.” Explain the sentence employing the appropr iate model [Note: you are not asked just to expose the model but rather to explain the sentence!!]