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Monetary policy and European unemployment

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  • Ronald Schettkat
  • Rongrong Sun

Abstract

In the long history of rising and persistent unemployment in Europe, almost all welfare-state institutions--employment protection legislation, unions, wages, wage structure, unemployment insurance, etc.--have been alleged to have caused and found guilty of causing this tragic development at some point in time. Later, welfare-state institutions in interaction with external shocks were identified as more plausible causes of rising equilibrium unemployment in Europe. Monetary policy has managed to be regarded as innocent. Based on the assertion of the neutrality of money in the medium and long run, the search for causes of European unemployment has shied away from the policy of central banks. But actually the institutional set-up regarding monetary policy is very different between the Federal Reserve System (Fed) and the Bundesbank and its successor, The European Central Bank (ECB). We argue that the interaction of adverse shocks and tight monetary policies may have been the major--although probably not the only--cause of unemployment in Europe remaining at ever higher levels after each recession. We identify the monetary policy of the Bundesbank as asymmetrical, in the sense that the Bank did not actively fight against recessions, but it dampened recovery periods. Less constraint on growth would have kept German unemployment at lower levels. Copyright 2009, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 25 (2009)
Issue (Month): 1 (Spring)
Pages: 94-108

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Handle: RePEc:oup:oxford:v:25:y:2009:i:1:p:94-108

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Cited by:
  1. Simon STURN, 2013. "Are corporatist labour markets different? Labour market regimes and unemployment in OECD countries," International Labour Review, International Labour Organization, vol. 152(2), pages 237-254, 06.
  2. Barnett, William & Eryilmaz, Unal, 2012. "An analytical and numerical search for bifurcations in open economy New Keynesian models," MPRA Paper 40426, University Library of Munich, Germany.
  3. Sonja Jovicic & Ronald Schettkat, 2013. "Does Inequality Promote Employment? An International Comparison," Schumpeter Discussion Papers SDP13009, Universitätsbibliothek Wuppertal, University Library.
  4. Ronald Schettkat & Rongrong Sun, 2009. "Nicht zu früh bremsen! - Der Einfluss der Geldpolitik auf die langfristige Wirtschaftsentwicklung in Deutschland und den USA-," Schumpeter Discussion Papers sdp09003, Universitätsbibliothek Wuppertal, University Library.
  5. David R. Howell, 2010. "Institutions, Aggregate Demand and Cross-Country Employment Performance: Alternative Theoretical Perspectives and the Evidence," Working Papers wp228, Political Economy Research Institute, University of Massachusetts at Amherst.
  6. Simon Sturn, 2011. "Labour market regimes and unemployment in OECD countries," IMK Working Paper 6-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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