0:15
We've seen then how exchange rate policy can also influence the economy, and how It
can lead policy makers into sort of contradictions,
as they try to decide what to do.
There's a fourth policy.
We mention fiscal, monetary, exchange rate and structural.
Structural policy is a very big one.
It's kind of hard to define.
It doesn't work nearly in the same way as the others.
Structural policy is.
All of those changes that can be made in the legal structure, the
bureaucratic structure, the relationships in the economy
[SOUND] that influence the way it works.
0:53
Now, structure or forms of term is very politically charge because
a lot of the time it's been used by the IMF
[UNKNOWN] Governments that are looking for, you know, a much more
free market environment and they're kind of attacking unions or, whatever.
So sometimes the term carries a lot of political weight with it.
But in general, if we're talking about the
government influencing the economy it's important to consider structural
reform Because structural reform affects the supply side of
the economy, the aggregate supply curve of the economy.
And that makes it really different from all
of the policies we've talked about so far.
You notice that since we started with fiscal policy, we
haven't referred to the supply curve, it's just inert there, right?
Sloping upward on our aggregate supply route demand diagram.
And the other, all the policies we've looked at,
fiscal, monetary, exchange rate, they move the aggregate demand curve.
But what about that aggregate supply curve?
Is it really inert?
Does it just sit there?
Well no it doesn't.
The aggregate supply curve, as we talked about in an early session.
Does shift as well, and it mainly shifts when production costs change.
2:04
Any kind of production cost.
It can be the cost of energy, it can be the cost of paying taxes.
It can be the cost of financing.
And it can also be just the cost of complying with government regulations.
So, the aggregate supply curve is moved By structural changes in the economy.
Let's imagine for instance that we're in France, year 2000, and the government
decides that workers need to work 35 hours a week instead of
40, and that it, passes a law saying that companies need to
have their workers work only 35 hours but pay them the same amount.
Now, this is something that actually happened, alright.
What would happen to our aggregate supply aggregate demand diagram?
Well think about it a minute.
Companies find themselves with increased production cost, don't they?
Because suddenly fewer hours work cost them the
same money as more hours of work used to.
So if we look at our aggregate supply and aggregate supply
diagram, the aggregate supply curve is going to shift inward to the left.
All right because the cost of producing
the same amount of stuff has suddenly risen.
3:19
Well, what happens then to the economy?
If you draw this graph and you think about.
How inflation goes up and down on your vertical axis,
and how unemployment and GDP move on your horizontal axis.
You see that when agrid supply moves left, your new equilibrium will give you
less GDP, higher unemployment, and higher inflation, okay?
So this is a situation we refer to as Stagflation.
Here what we have is, we have a
legal change in the economy, that caused aggregate
supply to shift to the left, and therefore,
it caused the economy to suffer from stagflation.
So, what we find are a lot of
different rules and policies and changes in an economy.
Will effect agrid supply.
Their adopted for a particular reason, the 35 hour
week may have been a rational thing to do.
It makes sense.
With our income being so high that we should
actually work less and be able to enjoy our income.
But the effect of the policy was to shift agrid supply to the left because it
raised production cost for companies and therefor pushed
the economy into a situation with rising inflation.
And rising unemployment at the same time.
4:34
What can we do about these situations?
Well, again, this is why the term structural reform is politically charged.
Often people will say, we need to make it cheaper and easier for companies
to do business so that the aggregate supply curve moves outward to the right.
Okay?
Again, working with your diagram, you can see if you move
aggregate supply outward to the right instead of inward to the left.
Look at your new equilibrium.
You've got more GDP, less unemployment, on your
horizontal axis, and less inflation on your vertical axis.
It's the best of all possible worlds, right?
Less inflation, more output, less unemployment.
Everything's going well.
So, with structural form, what governments will usually try to do is they'll
try to do something to make it easier for companies to do business.
So that aggregate supply will shift to the right.
What are these things they can do?
Well, some of them don't look very prosocial.
So, for example, maybe you will Keep the minimum wage from rising
for eight years, so is something that happened under the Reagan administration.
So you just don't raise the minimum wage.
That means that production costs are lower for companies, and their
average supply curve over time will move out to the right.
And you get more growth and less
inflation, or maybe you can deregulate the economy.
So that companies don't have so many bureaucratic costs.
If you think about something like [SOUND] environmental policies.
Pro environmental policies.
We require companies to To be more careful with the environment.
To observe certain standards on waste, or on pollution or whatever it is.
These are, hugely desirable for the economy.
They're very much needed.
6:20
However, what they do is they raise the cost of doing business.
So, the agrid supply curve will inward to the left and this could cause
sort of a supply shock, if it were big enough, or sort of stagflation situation.
So if a government is saying, we need to dere,
deregulate, we move that aggregate supply curve out to the right.
Improve the economy, how do we deregulate?
Well, let's lift the environmental standards, right?
Or let's not adopt them.
6:44
I'm not promoting this.
Obviously, I think we need the environmental standards.
I'm just saying, the movement of the curve would be in a direction we would like.
So maybe, you know, throw out rules
like Black Economic Empowerment in South Africa.
Move their curve out to the right.
We have a social reason for the policy, but if
you want to really just deregulate, and move active supply out.
You would say throw these policies out the window.
[SOUND] There are other very positive things you can do.
Simply bureaucracy.
Is expensive, and often bureaucracy doesn't benefit
hardly anybody you know, who is benefited
when a company has to go through
15 different procedures to be created right so,
sometimes these policies are easy to change
and there not so politically charged you could
say alright I'm going to have a single window as the UK does or Canada does.
I have a single window where you go and you
can do everything to create the business in one day.
It doesn't hurt many people it's not you know
something that hurts the environment or, or stops us
from promoting equality or ending discrimination and it can
move that aggregate supply curve out to the right.
So, this is another policy option that governments
have in different situations to move the economy.
We should be aware that structural reform is,
can be very slow and somewhat unpredictable, okay?
It may take a long time.
I change something in the economy.
I liberalize the labor market.
It might take a couple of years
before that actually reduces production costs for companies,
the average supply curve moves out, and we
start to see lower inflation and more growth.
8:35
It is however, very relevant because when we think about certain
countries, think about the countries that are in the Euro zone, alright.
The countries that share a currency and share a central bank.
We've got four policies don't we,
monetary, fiscal, exchange rate and structural.
Well, these countries have given up their monetary policy because a European
Central Bank controls their interest rates and their, and their monetary policy.
9:01
They've also given up an exchange rate policy
because they no longer have a separate currency.
Spain shares a currency with Germany.
Right so, they can't say, we're going to drop the value of our currency.
Okay?
And sometimes, they can't use fiscal policy very much, because of
something we're going to be talking about soon, which is austerity rules.
Reduce that budget deficit, reduce that debt, and so
in situations like this they made be left with only.
Structural policy to try to get the economy moving again.
Or maybe look at a developing country that has a very high foreign debt.
Alright, and so it's got problems with using both
monetary policy and exchange rate policy because imagine that,
that debt we know technically foreign debt is in
a foreign currency alright, imagine that debt is large.
And we know that if our currency falls in value.
The size of that debt in that local currency goes up.
We end up with a much bigger indebtedness problem.
So we can't really use monetary policy to stimulate the economy.
because if we cut interest rates to raise investment rates GDP.
Will also decrease the value of our
currency, increase the size of our foreign debt.
So what can this country do to stimulate their economy?
Well, they don't want to raise their indebtedness, they don't want to play
too much with monetary policy because the foreign debt may go up.
So, they may be only left with structural form too, to move the economy.
And the truth is that, deregulation understood in its right sense, not just
let everybody do what they want because
the economy definitely needs regulations, but going
through our regulations and finding out what really is good and useful, and what's
unnecessary and causes costs that are not
justified by the benefits of the regulation.
If we deregulate in that way,
going towards more rational regulations, this can
set in motion a process of shifting out where the aggregate supply curve
and get the economy moving again
with lower inflation, higher GDP, less unemployment
in situations where you really don't have the freedom to use your other tools
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Gayle AllardProfessor
