Joyeux Noel!

Bonjour buddies! Hola! The christmas days have come! How have you been doing?

Well... I am enjoying quite quiet times over Scotland. The region I am staying is pretty quiet and most of my university mates have gone back their home! Very very quiety and chilling out but very very very lonely christmas days! Today and tomorrow, I am gonna spend time at my good friend's flat to have christmas meals over 2 days.

The last semester has required me a load of works. The economic policy in Britain is a quite comprehensive course which enables me to analyse current econommic issues with using macroeconomic knowledges we have learned already. The economic policy in EU is a very interesting and beneficial subject as it indicates a lot of key issues involved in European Intergration in terms of both micro and macro economics point of view.


During the 4th year, I have to take 2 mathematics modules so I have attended so many lectures and seminars much more than not only majorities of the art-degree students but also other economics students taking economics as just a major or combining with accounting&finance or business management. I mean I have had a ton of works to do in my accademic life in this university, I wanted to say!

Any way, I hope all of you enjoy your rest of this year whatever you can deserve yourself! Cheerio!!

Economic Rationale --- Inflation rate should be refered/targeted?

The European Central Bank (ECB) is well known as a conservative central bank which adapts German model of monetary policy. The ECB is independent from government body and not allowed to have a contact with any community to determine their policy. Also the ECB has a little accountablity on economic situation as it is only interested in the inflation control. The ECN settle the reference inflation rate as 2%. This is different from the target inflation rate used by the Bank of England (BoE).


Focusing on the ECB monetary policy, it has been respected as the most stable inflation controlling one among all European Union (EU) members. According to the Barro-Gordom model, as the central bank with the lowest and stable inflation cotrol leads the monetary unions, all the member country of monetary union are benefited from the central bank. Barro-Gordom model indicates that the unemployment is structural and always the natural rate in the long-run so if the central bank sets the prefrence of the inflation rate lower, it enables the inflation rate stable over time. Also the country prefering higher inflation rate and lower unemployment does not success their policy to reduce the unemployment rate in the long run and the inflation rate eventually goes up in the long run. Therefure, Barro-Gordon model clarifies that countries would be better to follow the policy with lower inflation rate preference.

The ECB manages to control the inflaiton rate by means of the nominal interest rate. The ECB has a parliament constituted of representatives from all European Monetary Union (EMU) member nations. These representatives vote for the changing nominal interest rate. The decision is based on the majority voting system and all country have an equal power of vote.


On the other hand, there is a counter argument against determining the nominal interest rate by means of the inflation rate. Taylor argued that the output gap should be referred to settle the interest rate. Taylor indicated the importance of the output gap which is the gap between the potential economic activity level and the current economic acitivity level. This implies that the nominal interest should be changed not to target the inflation rate but to fill the output gap. In order to fill the output gap, if the real interest rate is lower the nominal interest rate should be increased and if the real interest rate is higher then the nominal interest rate should be declined regardless of the inflation rate.

Business-cycle and Ricardian-equivalence

The business cycle is an important objective to refer in order to operate an economic policy. Controlling business cycle is a significant policy for government because during the recession, government inevitably have to spend for the social security due to rise in both unemployment rate and the absolute poverty rate i.e. fall in the average income level. These factors are very crucial elements in economy because these factors are (In particular, unemployment is) a lugging indicator in economy. There are two main government demand management policies intervening into the business cycle; the monetary policy and the fiscal policy.

Some economists put priority on the counter-cyclical government expenditure plan. This policy connotes the fiscal policy is effective to control the business cycle. This reason is based on Keynesian theory denoting that the liquidity of money supply by the monetary policy is ineffective. These economists believe that the increase in government expenditure helps to overwhelm economic recession rather than the extra cash flow. Furthermore, the tax cannot be increased during the recession time as tax rise may perpetuate the recession. Therefore, they support to reduce the tax in order to stimulate the economic activity and incur national debt in order to cover the cost for the government expenditure.

By contrast, this point of view has been contradicted by Neoclassical economists. According to the Neoclassical point of view, the tax deduction does not have much impact on economy. The reason is that individuals may prefer save the amount of extra income from tax deduction to predict their extra expenditure for the interest payment for the government debt. This theory is called "Ricardian Equivalence".



Focusing on the graph, individuals prefer spending for consumption at both current and future time at the level of their utility curve. Therefore, although there is an tax deduction it does not have any effect on the current consumption level and eventually they still have to pay the interest payment through taxation in order to pay back for the debt incurred in the past. Thus, Ricardian equivalence states that the fiscal plan should be fixed over time.

Neoclassical theorists put emphasis on the monetary policy and the supply-side reforms in order to tackle with the recession.


Nevertheless, there has been a counter argument against Ricardian equivalence. Some economists argued that Ricardian equivalence might be true if the recession is not serious and the absolute poverty level is lower. Otherwise, tax deduction and
debt incuring are required.



Focusing on the graph above, if individuals have not gained enough income to consume, the extra tax deduction can increase the current consumption level because it expands the borrowing constraint. During the recession, some individuals may face this borrowing constraint which denotes the incapability of their income to both spend and save. Therefore, the Recardian equivalence might be contradicted in terms of the aspect that unless tax deduction and debt incurring take place, it may induce the recession lugging.

Currently... Septermber-October 2007

Hi everyone! I have not been able to update this blog for a while. Actually my course in uni is so tough that I continuously need to revise it. Furthremore, I am working at the part-time job about 21 hours a week. Therefore, I tend to be too preoccupied to update decent and academic document.

However, as the midterm break is coming soon I may have much more times for the update and I have got a quite interesting topic to write about! The topic is gonna be an "Economic Theory". I will introduce an economic policy of Hayato Ikeda the former prime minister with refering to Kenynesian economic growth theory.


* In addition: I attach a copy of one of my uni course works which is one of the most interesting one.

"Labour economics: Wage Cyclicality"

In terms of Keynesian Theory of “sticky wage”, the wage is counter-cyclical by means of the business cycle. Keynesian theory adjusts wage is fixed because wage is determined by a contract for a certain period so it hardly changes. Unlike the classical theory which denotes the “neutrality of money”, Keynesian theory indicates money supply influences an economic growth and the value of wage comparing to a current inflation rate. This theory clarifies that change in the price level influences how nominal wage, which is the actual wage individuals are paid, is worth, and then refers to “real wage” which is denoted as nominal wage divided by price inflation.



Focusing on the graph above, as an economic growth, implies aggregate demand rises from AD0 to AD1, occurs price rises from P0 to P1. Simultaneously, labour supply curve goes rightward alongside labour demand because more individuals are now willing to participate in an economic activity. All in all, price rise lowers real wage (W/P), which implies nominal wage is less worth than the current price level. On the other hand, economic recession causes price goes down which create aggregate demand goes down. This shifts labour supply to the leftward alongside labour demand because individuals are more likely to be expelled from labour market because of job loss and rise in real wage. J M Keynes put emphasis on the impact of real wage during the recession. He inferred as price level goes down revenues of sales goes down and the value of nominal wage which is fixed by contracts is higher comparing to the current price level. Therefore, employers are willing to cut down numbers of employees due to the rise in their cost coverage.




Real wage is the measure how nominal wage is worth comparing to the current price level. The reason why government policy makers care about the real wage level is it causes a fluctuation in employment rate. The rising real wage during a particular recession period causes rise in unemployment. Unemployment is quite lagging so then affects to remains an unemployment rate higher than expected in later periods. People might be used to being unemployed and structural unemployment is concerned after some individuals are unemployed for a relatively longer period.

≫ Keynesian theory highly put emphasis on wage counter-cyclicality along the business cycle
- It does not account either change in labourers demanded or wage pro-cyclicality

- Wage is fixed by contract
- During the recession price keeps going down due to the pessimism about future
- “Exogenous fall in investment” causes economic growth more stagnated i.e.

- Lowering interest-rate is less effective because of the pessimism
- Fiscal policy, creating public sector jobs and taxation policy, is more affective

≫ Friedmanite theory assumes wage is more likely counter-cyclical
- During the growth, technological advance may causes wage pro-cyclicality due to a rise in demand of labourers

- Although wage is reasonably flexible but there is a gap between the price inflation rate and the wage inflation late e.g. Price (5%); Nominal-Wage (2%)
- Lack of Rationale: During the recession, the real price fall can be lower than expected
- Monetary policy is affective in the short-run
- Information should promote the rational expectation.

Major Richard Sharpe, 95th Rifles!!

"Richard Sharpe, 95th Rifles!"

Ummmmm, as I have been reading Sharpe series, I tend to image a lot about Sharpe's 95th rifles' actions. Even I tend to a wee bit feel like Richard Sharpe especcially when I am in a hard mission in my daily life, and then I tend to pretend like holding a rifle and swinging a sword :) hahahahahaha.

Sharpe is a series of novel writing about success story of an ambitious and generous British man called Richard Sharpe. Sharpe was originally born as an illegitimate son, and he volunteered as a private in British Army during Napoleonic War period. He started from Private, and then he has been gradually promoted to Sergeant, Lieutenant, Captain, and then to Major. In Sharpe's Waterloo, he was finally promoted to Lieutenant Colonel!

This novel and DVD is highly recommendable to practice the English of Millitary, Social Class, Romance and historical aspects of Napoleonic period! Highly recommendable!!



Rifles! Make Ready! Fire!!!!!!!!

Mechanism of Deflation spiral and critic of Japanese policies --- Sequel

Speaking of the motivation of labour correlated to the wage level, this has been explained by the school of marginal theory referring to the graph below:



The propensity to allocate time to labouring can depend on the wage incentive. During the wage level is lower, the correlation of labouring time and wage is highly positive, which implies people tend to work harder as wage goes up. Also, most of people appreciate that if individuals earn extraordinary high wage the correlation of labouring time and wage can be negative as these individuals hold enough cash already to sustain their minimum standard of living by working little. But this situation is not the situation of majority of individuals so this essay ignores this part, then it focuses more on the lower wage earners and individuals those earn about between the slightly lower and moderately higher than average. The efficient wage level is where labourers are encouraged to allocate time to work at the efficient level whenever the wage level is, which implies the wage elasticity of supply is perfectly inelastic. At this level, the unemployment rate reaches to the natural rate which denotes the level of economic activity is moderate and stable. However it is quite difficult to detect the stationary point between the positive correlating point and the perfect inelastic point, where is supposed to be a most suitable point to settle the minimum-wage level. Furthermore, if economists overestimate this point, it harms the supply-side, which is the side employs labourers from the labour market, and encourages employers to hire less labourers therefore conversely increases the unemployment rate. Thus, this situation is more likely to concern an expected simultaneous rise in economic growth and wage inflation. The economic growth which does not stimulate rise in the wage level in the lower than average occurs in current Japanese economy. As it explained in the prequel the deflation spiral instigates the situation unamendable to decrease the involuntary unemployment rate and the long term cause to induce the recession again.

In order to eliminate the situation Japanese economy has been in, both the change in labour laws and the encouraged price inflation are recommendable. During the operation of Zero-Interest-rate policy some economists suggested to operate the fiscal intervention into the private market in order to stimulate both the efficient economic growth, this connotation implies the situation in which the economic growth benefits social stability and environmental protection, and reduce the unemployment. In the situation where economic growth occurs but the price inflation is stagnated, the amendment of labour law can be the priority over the fiscal intervention. In order to distort the deflation spiral concerning to the lowering unemployment, the rise in minimum wage at the moderate level is insisted and the reinforcement of employment contracts to promote flexibility for labourers to secure appropriate labouring time and proper wage paid or alter a job is inevitably required. By means of the fiscal policy, the government could have increased the public sector jobs which can employ potential labourers who were reluctant to be employed by the private sector due to the current situation or invested into the private sector industries which encourages positive externalities like investing for venture businesses to encourage the market competition, improving and advancing the education level, reducing pollution level, increasing sufficiency rate of agricultural products, etc. Also an increase in public sector jobs may stimulate the rise in demand of labourers in labour market, which keeps the wage level up and then prevents the deflation spiral more likely.

By contrast, although this essay puts emphasis on the fiscal intervention into market in order to rise the demand of labourers and then accelerate the price inflation level it also warns the “excess” fiscal intervention. For example, Japanese Communist Party claims, aiming to increase public service, and introduction of universal coverage of the health service and a free education system, to inevitably increase the tax revenue. This top up of tax revenue takes the stagnation of the GDP growth for granted with intend to focus on the long run growth of both business and society. This is a typical Neo-Marxist of economic policy. We post modern Keynesians indeed contradict this opportunistic focus on the long run expectation of economic growth and the abandoned short run focus. The theory introduced in this essay affirms an importance of the budget balance of a proportion of GDP growth and the government expenditure. Although as same as Japanese Communist Party the theory of this statement regards high of the social stability, it strongly insists on both a non-volatile and upward economic growth and a deliberate fiscal intervention rather than a volatile economic growth.



Focusing on the graph above,