CHAPTER CHAPTER15. Financial Markets and Expectations. Prepared by: Fernando Quijano and Yvonn Quijano

Transcription

1 Financial Marks and Prpard by: Frnando Quijano and Yvonn Quijano CHAPTER CHAPTER Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard

2 Bond Prics and Bond Yilds Figur 15-1 U.S. Yild Curvs: Novmbr 1, 2000 and Jun 1, 2001 Th yild curv, which was slighly downward sloping in Novmbr 2000, was sharply upward sloping svn monhs lar. Th rlaion bwn mauriy and yild is calld h yild curv, or h rm srucur of inrs ras Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 2 of 33

3 From Bond Prics o Bond Yilds Th yild o mauriy on an n-yar bond, or h n-yar inrs ra, is h consan annual inrs ra ha maks h bond pric oday qual o h prsn valu of fuur paymns of h bond. $ P 2 = $100 ( 1 + i ) 2 So, you ak h fuur paymn as givn, h currn pric as givn and calcula h inrs ra saisfying h qualiy of fuur paymns and currn pric Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 3 of 33

4 From Bond Prics o Bond Yilds Th valu of an invsmn in a 2 yar bond has o b qual o h valu of h invsmn on a 1 yar bond, wo yars afr ach ohr: $100 $100 2 = ( 1+ i ) ( 1+ i )( 1+ i + ) 2 hrfor: ( ) 2 ( )( + = 1+ i + i ) 1 i From hr, w can solv for i Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 4 of 33

5 Arbirag Moivaion You hav $100. You wan o invs i for 2 yars. You can invs i in a 2 yar bond or wo ims in a 1 yar bond. Wih h firs opion you hav afr 2 yars: Wih h scond opion, you hav afr 1 yar: ( ) $ ( + i ) 2 $ i 1 And afr 2 yars: ( )( + + i ) $ i Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 5 of 33

6 Arbirag Moivaion Th payoff from h 2 invsmns should b qual: ( ) 2 ( )( + = $ i + i ) $ i Th xprssion in h book is diffrn, bcaus inrs ras ar in h dnominaor. Th book qualizs h n prsn valu in priod 0. Th oucom is h sam: ( ) 2 ( )( + = 1+ i + i ) 1 i Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 6 of 33

7 Rwri Wri in logs: ( ) 2 ( )( 1+ = ln 1+ i + i ) ln + i ( ) ( ) ( + = ln 1+ i + ln + i ) 2 ln 1 i For x small: ln( 1+ x) x Using his rul: i i i Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 7 of 33

8 From Bond Prics o Bond Yilds Hnc h yild o mauriy on a wo-yar bond, is closly approximad by: 1 i ( i + i ) In words, h wo-yar inrs ra is h avrag of h currn on-yar inrs ra and nx yar s s xpcd on-yar inrs ra. Hnc, long-rm inrs ras rflc currn and fuur xpcd shor-rm inrs ras Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 8 of 33

9 Prdicing Fuur Shor-rm Inrs Ras 1 i2 ( i1 + i1 + 1) 2 W can us his xprssion o mak prdicions for h shor rm inrs ra in h fuur using h yild curv. W can solv for i + 1 from his xprssion: i + 1 = 2i2 i Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 9 of 33

10 Explaining Th Yild Curv Figur 15-1 U.S. Yild Curvs: Novmbr 1, 2000 and Jun 1, 2001 Th yild curv givs h yarly yild (or ra of rurn) on bonds of diffrn mauriis So, w can s boh i 2 and i 1 i1 + 1 Wha can w prdic hn abou 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 10 of 33

11 Inrpring h Yild Curv i + = 2i i An upward sloping yild curv mans ha inrs ras on bonds wih longr mauriy ar highr han inrs ras on shor mauriy bonds. Financial marks xpc shor-rm ras o b highr in h fuur. A downward sloping yild curv mans ha longrm inrs ras ar lowr han shor-rm inrs ras. Financial marks xpc shorrm ras o b lowr in h fuur Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 11 of 33

12 How o Explain This Yild Curv? Figur 15-1 U.S. Yild Curvs: Novmbr 1, 2000 and Jun 1, 2001 Th yild curv, which was slighly downward sloping in Novmbr 2000, was sharply upward sloping svn monhs lar. In ohr words: How o xplain an xpcd incras in inrs ras? 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 12 of 33

13 Th Yild Curv and Economic Aciviy Figur 15-3 Th U.S. conomy as of Novmbr 2000 In Novmbr 2000, h U.S. conomy was opraing abov h naural lvl of oupu. Forcass wr for a sof landing, a rurn of oupu o h naural lvl of oupu, and a small dcras in inrs ras as rflcd in h yild curv Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 13 of 33

14 Th Yild Curv and Economic Aciviy Figur 15-4 Th U.S. Economy from Novmbr 2000 o Jun 2001 From Novmbr 2000 o Jun 2001, an advrs shif in spnding, oghr wih a monary xpansion, combind o lad o a dcras in h shor-rm inrs ra Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 14 of 33

15 Th Yild Curv and Economic Aciviy From his figur, you can s h wo major dvlopmns: Th advrs shif in spnding was srongr han had bn xpcd. Th IS curv shifd inwards much mor. Ralizing ha h slowdown was srongr han i had anicipad, h Fd shifd in arly 2001 o a policy of monary xpansion, lading o a downward shif in h LM curv Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 15 of 33

16 Effc on Chang in Yild Curv? Figur 15-1 U.S. Yild Curvs: Novmbr 1, 2000 and Jun 1, 2001 Bcaus h inrs ra wn down mor han xpcd h yild curv shifd down Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 16 of 33

17 How o Explain This Yild Curv? Figur 15-1 U.S. Yild Curvs: Novmbr 1, 2000 and Jun 1, 2001 Th yild curv, which was slighly downward sloping in Novmbr 2000, was sharply upward sloping svn monhs lar. Why do w s an upward sloping yild curv? Bcaus h mark xpcs an incras in shor rm inrs ras. Rmmbr: i + = 2i i Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 17 of 33

18 Th Yild Curv and Economic Aciviy Financial marks xpcd wo main dvlopmns: Thy xpcd a pickup in spnding-a shif of h IS curv o h righ, from IS o IS. Thy also xpcd ha, onc h IS curv sard shifing o h righ and oupu sard o rcovr, h Fd would sar shifing back o a ighr monary policy. Hnc, inrs ras wr xpcd o ris, which in ffc hy did no as quick as h mark xpcd 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 18 of 33

19 15-2 Th Sock Mark and Movmns in Sock Prics Firms rais funds in wo ways: Through db financ bonds and loans; and Through quiy financ, hrough issus of socks or shars. Bonds pay prdrmind amouns; socks pay dividnds from h firm s profis Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 19 of 33

20 Th Sock Mark and Movmns in Sock Prics Figur 15-6 Sandard and Poor s Sock Pric Indx, in Ral Trms sinc 1980 Nominal sock prics hav muliplid by 25 sinc Ral sock prics hav only muliplid by 4. Ral sock prics wn hrough a slump unil h la 1980s. Only sinc hn hav hy grown rapidly Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 20 of 33

21 Sock Prics as Prsn Valus Th pric of a sock mus qual h prsn valu of fuur xpcd dividnds: $ Q = In ral rms, Q = $ D + 1 $ D ( 1 + i ) ( 1+ i )( 1+ i ) D + 1 D ( 1 + r ) ( 1+ r )( 1+ r ) 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 21 of 33

22 Sock Prics as Prsn Valus Q = D + 1 D ( 1 + r ) ( 1+ r )( 1+ r ) This rlaion has wo imporan implicaions: Highr xpcd fuur ral dividnds lad o a highr ral sock pric. Highr currn and xpcd fuur on-yar ral inrs ras lad o a lowr ral sock pric Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 22 of 33

23 Th Sock Mark and Economic Aciviy Sock prics follow a random walk if ach sp hy ak is as likly o b up as i is o b down. Thir movmns ar hrfor unprdicabl. Evn hough major movmns in sock prics canno b prdicd, w can sill do wo hings: W can look back and idnify h nws o which h mark racd. W can ask wha if qusions Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 23 of 33

24 A Monary Expansion and h Sock Mark Figur 15-7 An Expansionary Monary Policy and h Sock Mark A monary xpansion dcrass h inrs ra and incrass oupu. Wha i dos o h sock mark dpnds on whhr financial marks anicipad h monary xpansion Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 24 of 33

25 An Incras in Consumr Spnding and h Sock Mark Figur 15 8 (a) An Incras in Consumpion Spnding and h Sock Mark Th incras in consumpion spnding lads o a highr inrs ra and a highr lvl of oupu. Wha happns o h sock mark dpnds on h slop of h LM curv and on h Fd s bhavior Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 25 of 33

26 An Incras in Consumr Spnding and h Sock Mark Figur 15 8(b) An Incras in Consumpion Spnding and h Sock Mark If h LM curv is fla, h inrs ra incrass lil, and oupu incrass a lo. Sock prics go up. If h LM curv is sp, h inrs ra incrass a lo, and oupu incrass lil. Sock prics go down 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 26 of 33

27 An Incras in Consumr Spnding and h Sock Mark Figur 15 8(c) An Incras in Consumpion Spnding and h Sock Mark If h Fd accommodas, h inrs ra dos no incras, bu oupu dos. Sock prics go up. If h Fd dcids insad o kp oupu consan, h inrs ra incrass, bu oupu dos no. Sock prics go down Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 27 of 33

28 An Incras in Consumr Spnding and h Sock Mark Thr ar svral hings h Fd may do afr rciving nws of srong conomic aciviy: Thy may accommoda, or incras h mony supply in lin wih mony dmand so as o avoid an incras in h inrs ra. Thy may kp h sam monary policy, laving h LM curv unchangd causing h conomy o mov along h LM curv Or h Fd may worry ha an incras in oupu abov Y A may lad o an incras in inflaion Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 28 of 33

29 15-3 Bubbls, Fads, and Sock Prics Sock prics ar no always qual o hir fundamnal valu, or h prsn valu of xpcd dividnds. Raional spculaiv bubbls occur whn sock prics incras jus bcaus invsors xpcd hm o. Dviaions of sock prics from hir fundamnal valu ar calld fads Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 29 of 33

30 15-3 Raional Spculaiv Bubbls Raional spculaiv bubbls occur whn sock prics incras jus bcaus invsors xpcd hm o. To s his, considr h following quaion: $ D $ Q $ Q = + 1+ i1 1+ ii $ Q + 1 $Q If vrybody xpcs o b high, will also b high. Whras $ Q could b smallr han h xpcd + 1 valu of fuur dividnd srams. Thn w hav a raional bubbl 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 30 of 33

31 Financial Marks and Prpard by: Frnando Quijano and Yvonn Quijano CHAPTER CHAPTER Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard

32 16-1 Consumpion Th hory of consumpion was dvlopd by Milon Fridman in h 1950s, who calld i h prmann incom hory of consumpion, and by Franco Modigliani, who calld i h lif cycl hory of consumpion. Up Clos and Prsonal: Larning from Panl Daa Ss Panl daa ss ar daa ss ha show h valu of on or mor variabls for many individuals or many firms ovr im Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 32 of 26

33 Th Vry Forsighd Consumr A vry forsighd consumr dcids how much o consum basd on h valu of his oal walh, which compriss: Th valu of his nonhuman walh, or h sum of financial walh and housing walh. Th valu of his human walh, which is h sum of all xpcd fuur incom srams Th valu of his human walh and nonhuman walh oghr givs an sima of his oal walh. Consumpion dpnds on oal walh for a raional forsighd consumr C = C( oal walh ) 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 33 of 26

34 An Exampl Building on wha you saw in Chapr 14, l s compu h prsn valu of your labor incom as h valu of ral xpcd afr-ax labor incom, discound using ral inrs ras. VY ( T) = ($40, 000)( 0. 75)( 72. 2) = $2, 166, 000 L Your walh oday, h xpcd valu of your lifim afr-ax labor incom, is around $2 million. If you ar raional you will wan o sprad his lifim incom qually ovr your whol lif 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 34 of 26

35 Th Effc of Currn Incom on Consumpion A raional consumr would sprad his lifim incom qually ovr his lif Bu hr ar many rasons why also currn incom mars and no only lifim incom: In h bginning of your lif you migh wan o consum lss han lar on, whn you hav kids for xampl Th assumpion ha you can prcisly calcula your lifim walh is oo much You migh b prudn, bcaus fuur incom is uncrain You migh b crdi consraind, if you xpc a srong incras in incom, sill you migh no b abl o convinc h bank o g a larg loan 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 35 of 26

36 Toward a Mor Ralisic Dscripion So, consumpion dpnds on lifim walh Bu consumpion dpnds no only on lifim walh bu also on currn incom, so w hav as consumpion funcion: C Y L ( Toal walh Y T ) = C, = ral labor incom in yar. T = ral axs in yar. l 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 36 of 26

37 Puing Things Toghr: Currn Incom,, and Consumpion affc consumpion in wo ways: Dircly hrough human walh, or xpcaions of fuur labor incom, ral inrs ras, and axs. Indircly hrough nonhuman walh - socks, bonds, and housing. of h valu of nonhuman walh is compud by financial marks Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 37 of 26

38 Do Popl Sav Enough for Rirmn? Tabl 1 Man Walh of Popl, Ag 65-69, in 1991 (in housands of 1991 dollars) Social Scuriy Pnsion $100 Employr-providd pnsion $62 Prsonal rirmn asss $11 Ohr financial asss $42 Hom quiy $65 Ohr quiy $34 Toal $ Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 38 of 26

39 Puing Things Toghr: Currn Incom,, and Consumpion This dpndnc of consumpion on xpcaions has wo main implicaions for h rlaion bwn consumpion and incom: Consumpion is likly o rspond lss han on for on o flucuaions in currn incom: h flucuaion migh b mporary and hn you smooh h ffc of h shock ovr im. Consumpion may mov vn if currn incom dos no chang. Consumpion may mov vn if currn incom dos no du o changs in consumr confidnc Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 39 of 26

40 16-2 Invsmn Invsmn dcisions dpnd on currn sals, h currn ral inrs ra, and on xpcaions of h fuur. Th dcision o buy a machin dpnds on h prsn valu of h profis h firm can xpc from having his machin vrsus h cos of buying i Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 40 of 26

41 Invsmn and of Profi Dprciaion: Th ra of dprciaion, δ, masurs how much usfulnss h machin loss from on yar o h nx. Rasonabl valus for δ ar bwn 4 and 15% for machins, and bwn 2 and 4% for buildings and facoris Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 41 of 26

42 Th Prsn valu of Expcd Profis V(Π ): Th prsn valu, in yar, of xpcd profi in yar +1 quals: In yar +2, In yar, 1 Π r 1 1 ( 1 )( 1 ) ( δ + r + r ) Π V ( Π ) = 1 r Π ( + r )( + r ) ( 1 δ ) Π Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 42 of 26

43 Th Prsn valu of Expcd Profis Figur 16-1 Compuing h Prsn Valu of Expcd Profis 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 43 of 26

44 Th Invsmn Dcision Dno I as aggrga invsmn, Π as profi pr machin (or pr uni of capial) for h conomy as a whol, and V(Π ) as h xpcd prsn valu of profi pr uni of capial. This yilds h invsmn funcion: I = I( V( Π )) ( + ) In words: In words: Invsmn dpnds posiivly on h xpcd prsn valu of fuur profis (pr uni of capial) Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 44 of 26

45 A Convnin Spcial Cas Suppos firms xpc boh fuur profis and fuur inrs ras o rmain a h sam lvl as oday, so ha Π = Π = Π and r = r = r Economiss call such xpcaions xpcaions ha h fuur will b lik h prsn saic xpcaions. Undr hs wo assumpions, w g V ( Π ) = r Π + δ 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 45 of 26

46 Invsmn and h Sock Mark Figur 1 Tobin s q. Vrsus h Raio of Invsmn o Capial: Annual Ras of Chang, Tobin s q dnos h variabl corrsponding o h valu of a uni of capial in plac rlaiv o is purchas pric Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 46 of 26

47 A Convnin Spcial Cas Π Puing V ( Π ) = r and + δ I I V Π oghr giv us an quaion for invsmn: I = Π I r + δ = ( ( )) Th sum of h ral inrs ra and h dprciaion ra is calld h usr cos or h rnal cos of capial. Thrfor, Rnal Cos = ( + δ) r 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 47 of 26

48 Currn Vrsus Expcd Profi Invsmn dpnds on xpcd fuur profi, bu also movs srongly wih flucuaions in currn profi. I = I( V( Π ), Π ) ( +, + ) Firms may b rlucan o borrow if currn profi is low. Bu if currn profi is high, h firm may no nd o borrow o financ is invsmns. Evn if h firm wans o invs, i migh hav difficuly borrowing. Ponial lndrs may no b convincd h projc is as good as h firms says Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 48 of 26

49 Currn Vrsus Expcd Profi Figur 16-2 Changs in Invsmn and Changs in Profi in h Unid Sas sinc 1960 Invsmn and profi mov vry much oghr Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 49 of 26

50 Profiabiliy Vrsus Cash Flow Profiabiliy rfrs o h xpcd prsn discound valu of profis. Cash flow rfrs o currn profi, or h n flow of cash h firm is rciving. Boh profiabiliy and cash flow ar imporan for invsmn dcisions, and ar likly o mov oghr Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 50 of 26

51 Profis and Sals Figur 16-3 Changs in Profi pr Uni of Capial Vrsus Changs in h Raio of Oupu o Capial in h Unid Sas sinc 1960 Profi and h raio of oupu o capial mov largly oghr. Π = Π Y K 2006 Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 51 of 26

52 16-3 Th Volailiy of Consumpion and Invsmn L s look a h similariis bwn our ramn of consumpion and of invsmn bhavior: Whhr consumrs prciv currn movmns in incom o b ransiory or prmann affcs hir consumpion dcisions. In h sam way, whhr firms prciv currn movmns in sals o b ransiory or prmann affcs hir invsmn dcisions Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 52 of 26

53 Th Volailiy of Consumpion and Invsmn Bu hr ar also imporan diffrncs bwn consumpion dcisions and invsmn dcisions: Whn facd wih an incras in incom ha consumrs prciv as prmann, hy rspond wih a mos an qual incras in consumpion. Whn firms ar facd wih an incras in sals hy bliv o b prmann, hir prsn valu of xpcd profis incrass, lading o an incras in invsmn Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 53 of 26

54 Th Volailiy of Consumpion and Invsmn Figur 16-4 Ras of Chang of Consumpion and Invsmn sinc 1960 Rlaiv movmns in invsmn ar much largr han rlaiv movmns in consumpion Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 54 of 26

55 Th Volailiy of Consumpion and Invsmn Th figur yilds hr conclusions: Consumpion and invsmn usually mov oghr. Invsmn is much mor volail han consumpion. Bcaus, howvr, h lvl of invsmn is much smallr han h lvl of consumpion, changs in invsmn from on yar o h nx nd up bing of h sam ovrall magniud as changs in consumpion Prnic Hall Businss Publishing Macroconomics, 4/ Olivir Blanchard 55 of 26