Short-term interest rates and real inflation in Germany

the level of MI at EMS since the early 1980s. It can be seen that since the mid-1980s monetary
policy has become proscyclical: (the economic cycle is declining or unstable, credit distribution is definitely
low). In particular, during the recession * 1991-92 monetary policy became very tight. Thus, Friedman's rules
for carrying out monetary policy were abolished. The theory that led the authorities to do this was that
according to the Barro-Gordon model there was no compromise that would jeopardize acceptable anti-
inflation credibility. There is rarely a theory that is so influential.

* recession: or kemorosotan is a condition when gross domestic product (GDP) decreases or when real
economic growth is negative for two or more quarters in one year

PERFECT PREFACE AND OPEN ECONOMIC MACROECONOMY

The use of the assumption of rational expectations has become a major discovery in
macroeconomics. This also led to the development of the macromodel foresight combining perfectly as an
assumption of hope. The contribution of updating in macroeconomic economics is certainly open Dornbusch
(1976). This causes hundreds of articles to combine perfect future views as an assumption of basic
information that governs expectations of private economic agents **. The attraction of these models is their
ability to precisely describe the dynamics of adjusting exchange rates, outputs and prices. Their extraordinary
intellectual beauty (and discovery) is under perfect foresight.

** some examples of Wilson's (1979) model, Turnovsky (1985), Obstfeld and Stockman (1985)
about views to a perfect future can easily be included in Mundell Flemin

Real Short-term Interest Rates and GDP Growth Rate in EMS Countries
Get a heavy path from dynamics to balance. The extraordinary intellectual achievement of these
models also explains their success in classroom teaching. They enable teachers to demonstrate technical skills
in obtaining dynamic solutions and have not referred to some real (very selective) data evidence that shows
that these models have great explanatory power.
Serious problems arise about the scientific foundation of a perfect foresight model. One can be
formulated along the lines developed by Hayek in his criticism of neoclassical economics (see Hayek, 1945).
The perfect foresight model starts from the proposition that all information in the economy (represented by
the underlying economic model) can also be found in one individual. This is of course a strong assumption. In
Hayek's view, total information is possible, we will not need a market system. Market systems have evolved
because they are the most efficient method of processing partial information (some of the whole) and
incomplete given to individuals. If individuals have complete information about the underlying economic
model, the market system will never emerge. In a different way, perfect foresight and a market system
basically not available in an economy can never be given to one individual.

If this is the case, the second criticism of the model of perfect foresight is excessive similarity

Tingkat Pertumbuhan M1 dan Pertumbuhan Nyata GDP di Negara-negara EMS

about the dynamics that govern adjustments to balance. Certainly a model where economic agents
need to know the underlying model with limited accuracy to guide them to the unique paths that will bring
them to a long-term balance cannot be a real representation of the real world. Because such infinite precision
is not possible, the perfect forward-looking model actually predicts that the exchange rate never reaches a
unique heavy path, so it must walk along an unstable road. It is clear that such explosive: (explosive) behavior
is not observed as a rule. One can conclude that a perfect foresight model, although logically consistent, has
no scientific basis.
CONCLUSION: PROBLEMS THAT ARE NOT LEFT
The new classic paradigm of course gives new information to current macroeconomic phenomena.
However, this new paradigm is not without problems. We will identify two of them. First, the pattern of the
time of unemployment in Europe is not fully in accordance with the predictions of the new classical
commodity. In particular, the increase in the unemployment rate follows a clear cycle pattern. With each
recession, the unemployment rate rises, while only partially decreases during the boom (see Figure 2.13,
which shows how the unemployment rate doubled during the recession of 1975-76 and 1980-83
(page 46) and never returns to its initial level, Different, after each cycle, the unemployment rate reaches a
higher plateau.
This feature of the unemployment rate cannot be easily explained in the new classic
macromodel context. . This confusing unemployment behavior has led to what is called the hysteresis
model (Blanchard and Summers, 1986) and to the model of insiders and outsiders in the labor market
(see Lindbeck and Snower, 1988). These models have characteristics that depend on the unemployment
rate. In particular, they lead to the possibility that some temporary shocks (cg temporary decline in
aggregate demand) increase permanent unemployment.
It is clear that if the world can be characterized by such models that show yield dependence, there
is some room for management demand, because by avoiding an increase in the unemployment cycle, one also
avoids the increase in permanent unemployment.
Second, many high-inflation countries in Europe begin the disinfection process based on the idea
that anti-inflation discipline can be bought by pegging the exchange rate to the Deutsche Mark: (German).
How successful is this strategy? Now it can be said that success is very simple. High inflation
countries such as Italy and Spain can certainly reduce their inflation rates significantly. However, this has
been achieved with real exchange rates increasing. This real award in turn causes a loss of competitiveness.
In the end this strategy became unsustainable and contributed to the speculative crisis in September 1992,
which forced these two countries to exit (Italy) or devalue (Spain). (For further evidence of this problem, see
de Grauwe 1990) and Svensson [1993])
In this connection, the case of the United Kingdom revealed, In the early 1980s Britain was
involved in a disinflation policy: (contrary to inflation, the prices of the general public fell to the value of
increasing money) without trying to fix the exchange rate. Aided by a strong appreciation of the pound, this
strategy caused a very rapid decline in the inflation rate. Although unemployment has risen sharply, there is
no evidence that the disinflation strategy for labor costs is higher than in EMS countries which peg their
currencies to Deutsch (see de Grauwe [1990] about this). The difficulty of economic disinflation by pegging
the exchange rate to a low inflation currency is not limited to EMS. Latin American countries have had the UK
feeling difficult to implement the policy. In many anti-inflation strategies based on fixing the exchange rate
against the dollar to be unsustainable due to the real appreciation of the currency and the subsequent effects
of deflation on output and employment (see Edwards and Lada, 1994: Klein and Marion, thus, people can
conclude that the idea, which comes from the Barro-Gordon model, that fixing exchange rates can be a tool
that creates the credibility of disinflation policies in general does not work well