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Macroeconomic Policy in the Presence of Structural Maladjustment

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  • Gordon, Robert J

Abstract

This paper analyses two-way interactions between structural reform and macroeconomic policy. If structural reforms increase the flexibility of labour markets, they are likely to improve the short-run inflation-unemployment trade-off, providing an incentive for policy-makers to expand aggregate demand. In turn, the promise by policy-makers that they will encourage a decline in unemployment in response to good news on inflation can be used to strike a political deal with political interests opposed to the introduction or extension of structural reform. Expansionary monetary policy also provides relief on the fiscal front, directly, by bringing the actual budget deficit closer to the structural budget deficit, and indirectly, by encouraging structural reform, potentially reducing the structural budget deficit itself. In 1992–3 several European countries dropped out of the ERM to pursue more expansionary monetary policies. The difference in the performance of these countries and those that maintained a peg between their currencies and the Deutsche mark provides an important test case of the consequences of expansionary monetary policy. The depreciating nations by 1995 enjoyed a substantial relative acceleration of nominal GDP and, surprisingly, an even greater deceleration of inflation, so that their growth rate of real GDP accelerated more than their growth rate of nominal GDP in relation to the pegging countries. The continued deceleration of inflation in the depreciating countries provides evidence that their natural unemployment rate has declined and that expansionary monetary policy has interacted beneficially with structural reform.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1493.

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Date of creation: Oct 1996
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Handle: RePEc:cpr:ceprdp:1493

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Keywords: Budget Deficit; Labour Markets; Monetary Policy;

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References

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  1. Branson, William H. & Rotemberg, Julio J., 1980. "International adjustment with wage rigidity," European Economic Review, Elsevier, vol. 13(3), pages 309-332, May.
  2. C Bean, 1992. "European Unemployment: A Survey," CEP Discussion Papers dp0071, Centre for Economic Performance, LSE.
  3. Robert J. Gordon, 1995. "Is There a Tradeoff between Unemployment and Productivity Growth?," NBER Working Papers 5081, National Bureau of Economic Research, Inc.
  4. De Grauwe, Paul, 1995. "The Economics of Convergence towards Monetary Union in Europe," CEPR Discussion Papers 1213, C.E.P.R. Discussion Papers.
  5. Rod Cross, 2000. "Hysteresis and Emu," Metroeconomica, Wiley Blackwell, vol. 51(4), pages 367-379, November.
  6. Jeffrey D. Sachs, 1979. "Wages, Profits, and Macroeconomic Adjustment: A Comparative Study," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(2), pages 269-332.
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Cited by:
  1. Calmfors, Lars, 1998. "Unemployment, Labour-Market Reform and Monetary Union," Seminar Papers 639, Stockholm University, Institute for International Economic Studies.
  2. Ansgar Belke & Daniel Gros, 1999. "Estimating the costs and benefits of EMU: The impact of external shocks on labour markets," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(1), pages 1-47, March.
  3. Dobrescu, Emilian, 2006. "Integration of macroeconomic behavioural relationships and the input-output block: Romanian modelling experience," MPRA Paper 35748, University Library of Munich, Germany.
  4. Berthold, Norbert & Fehn, Rainer, 2000. "Arbeitsmarktpolitik in der Europäischen Währungsunion," Wirtschaftswissenschaftliche Beiträge 38, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
  5. Matthias G�cke & Ansgar Belke, 1999. "Micro and Macro Hysteresis in Employment under Exchange Rate Uncertainty," Computing in Economics and Finance 1999 722, Society for Computational Economics.
  6. Norbert Berthold & Rainer Fehn & Eric Thode, 1999. "Real wage rigidities, accommodative demand policies, and the functioning of EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(4), pages 545-572, December.
  7. Aguiar, Alvaro & Ribeiro, Ana Paula, 2009. "Monetary policy and the transition costs of a labor market reform," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 547-560, December.
  8. Dobrescu, Emilian, 2006. "Macromodel of the Romanian market economy (version 2005)," MPRA Paper 35749, University Library of Munich, Germany.
  9. Artur Radziwill & Mateusz Walewski, 2003. "Future EMU Membership and Wage Flexibility in Selected EU Candidate Countries," CASE Network Studies and Analyses 0265, CASE-Center for Social and Economic Research.
  10. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.

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