Irving Fisher - History of Economic Thought - Lecture Slides, Slides of Economics

Download Irving Fisher - History of Economic Thought - Lecture Slides and more Slides Economics in PDF only on Docsity!

Irving Fisher

Irving Fisher (1867-1947)

• The Rate of Interest , 1907
• The Theory of Interest , 1930
• The Purchasing Power of Money ,

• Mathematical Investigations in the

Theory of Value and Prices , 1925

Diagrammatic Utility Maximization

• He introduced the familiar diagrammatic

representation of the maximization of utility

subject to a budget constraint.

• Indifference curves themselves were introduced by Francis Ysidro Edgeworth in his MathematicalPsychics , 1881.

Diagrammatic Utility Maximization

Good Y

Good X

Indifference Curves

Budget Constraint

Consumer’s Choice

Production

• For the case in which the amounts used in production of the various resources are fixed, Fisher showed that the producer maximizes profits by producing at that point on the PPF that has slope equal to the price of the good shown on the horizontal axis in terms of the good shown on the vertical axis.

Good Y

Good X

Production Possibilities Frontier

Slope = Price of X/Price of Y

Producer’s Choice

Taxation

• He showed that a consumption tax is a better

policy than an income tax (because it does not

alter our incentives to save).

Interest rate

• Fisher built on the ideas of John Rae and Eugen von Böhm-Bawerk to construct the modern theory of interest.
• He did this by inserting the production possibilities frontier, the maximum value line, and the indifference curves in the same graph and re- labeling the two goods as consumption now and consumption later.
• Along the way, he showed how the Walrasian general equilibrium model could contain behavior such as saving and investment.

Quantity theory of money

• Although Fisher did not add to the classical Quantity Theory of Money, he expressed the theory by the now familiar equation M  V = P  T. - Here M is the quantity of money, V is the velocity of money or the number of times the average dollar changes hands in, say, any given year, P is the value of the average transaction, and T is the number of transactions. - For simplicity, the equation is sometimes expressed as M  V = P  Y. In this case, P is the average level of prices of final goods and Y is the gross domestic product.)
• Fisher saw this equation as a tautology that becomes the Quantity Theory when V and T (or, Y) are assumed to be unaffected by changes in M.
• In that case any change in M makes P change in the same direction and by the same percentage.

Fisher Effect

• Fisher’s equation leads, by way of monetary

neutrality, to what is known as the Fisher Effect

• It is the prediction that an x percentage point

change in the inflation rate will cause an identical x percentage point change in the nominal interest rate.

• Fisher had argued—on empirical grounds—that

the Fisher Effect would be true only in the very long run.

‘Phillips Curve’

• Also, based on his statistical calculations,

Fisher had argued that there was a negative

correlation between the rate of inflation and

the unemployment rate, as far back as 1926.

• This is the so-called Phillips Curve credited to A.W. Phillips, apparently in error.