Adjustment path
The adjustment path ( English adjustment path , often only path is) a form of representation often more periodic adjustment processes in coordinate systems or in tabular form. With adaptation paths, these processes can be planned in advance and checked for deviations in the meantime.
Targeted changes to variables in economics that are directed towards adjustment usually do not lead directly ( i.e. in the same period) to the intended results. It often takes several years until the desired goals are achieved.
The adjustment path is a connection path between several points plotted in a coordinate system . These points show the development of various economic indicators in successive periods up to the achievement of the intended goal.
Economic indicators
Economic indicators can be any key figures that change over periods:
- inflation rate
- unemployment
- Production growth
- nominal money supply growth
- Interest rate level
- and much more
Application example
Special significance of the adjustment path gets when looking at the development of the inflation rate , and the order on the modified Phillips curve associated standing unemployment .
The reduction of the inflation rate ( disinflation ) of an economy through the control of the nominal money supply should serve as an example to illustrate an adjustment path . This example is based on the assumptions of Okun's law and the theory of the Phillips curve .
initial situation
A central bank decides to reduce the inflation rate from 16% to 4% over a period of five years. The unemployment rate is 8%, output growth is 4% and the nominal money supply is growing by 20% per year. The degree of dependence (α) of the victim relationship on the reduction of unemployment is 1. The coefficient β is 0.5 and denotes the degree of the effect of a production growth above the usual level on the unemployment rate. A low β stands for stronger legal and social inhibitions to adjust the number of employees directly in the event of fluctuations in production.
| Year 0 | |
|---|---|
| inflation | 16% |
| unemployment | 8th % |
| Production growth | 4% |
| Nominal money supply growth | 20% |
Path of inflation
Since the inflation rate is expected to fall by a total of 12 percentage points in 5 years, an even reduction of 2.4 percentage points per year is assumed. Faster adjustments to the desired inflation rate of 4% would lead to recession and social tension.
Path of unemployment
According to the Phillips curve, with an α of 1, unemployment must rise by the same percentage as the inflation rate should decrease. Since the inflation rate is supposed to decrease by 2.4 percentage points per year, unemployment in the 5 adjustment years must be 2.4 percentage points higher than in year 0.
Path of production growth
It is known through Okun's law that an increase in unemployment goes hand in hand with a decrease in output growth. With a β of 0.5 and an unemployment rate higher by 2.4 percentage points, output growth must initially be 2.4% / 0.5 = 4.8 percentage points lower than in year 0. The first year of adjustment results a production growth of 4% - 4.8% = -0.8%. In the following years up to year 5, production grows by 4% as in year 0. In order to allow the unemployment rate to fall back to the usual level from year 0 in the years following the adjustment, production growth must rise again in year 6 by the 4.8 percentage points calculated above. This results in a production growth in year 6 of 4% + 4.8% = 8.8%.
Path of money supply growth
Since output growth must correspond to nominal money supply growth minus inflation, the addition of the inflation rate and production growth results in the nominal money supply growth to be controlled by the central bank.
Tabular representation of the adjustment path
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | |
|---|---|---|---|---|---|---|---|---|
| inflation | 16% | 13.6% | 11.2% | 8.8% | 6.4% | 4% | 4% | 4% |
| unemployment | 8th % | 10.4% | 10.4% | 10.4% | 10.4% | 10.4% | 8th % | 8th % |
| Production growth | 4% | -0.8% | 4% | 4% | 4% | 4% | 8.8% | 4% |
| Nominal money supply growth | 20% | 12.8% | 15.2% | 12.8% | 10.4% | 8th % | 12.8% | 8th % |
literature
- Olivier Blanchard : Macroeconomics. 3rd edition, international edition. Prentice Hall International, Upper Saddle River NJ 2003, ISBN 0-13-110301-6 .
- Olivier Blanchard, Gerhard Illing: Macroeconomics. 3rd updated edition. Pearson Studium, Munich et al. 2004, ISBN 3-8273-7051-5 ( Wi - Wirtschaft ), (reprint. Ibid 2005).
- Olivier Blanchard, Gerhard Illing: Macroeconomics. 4th updated and expanded edition. Pearson Studium, Munich et al. 2006, ISBN 3-8273-7209-7 ( Wi - Wirtschaft ).
Web links
- <m @ kro> online, LORENZ, WILHELM, Okun's law.
- The Concise Encyclopedia of Economics, HOOVER, KEVIN D., Phillips Curve.
Individual evidence
- ^ Based on: Blanchard, Olivier and Illing, Gerhard: Makroökonomie . 3rd ed., Pearson, Munich, 2004, ISBN 3-8273-7051-5 , page 278.