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The Role of Demand Management in the Maintenance of Full Employment

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  • Bennett T. McCallum

Abstract

This paper begins by identifying nominal price stickiness as the logical basis for the Keynesian or activist point of view concerning demand management policy. It then characterizes two alternative approaches to policy analysis that have been adopted by adherents of the Keynesian position, the "disequilibrium" and "Phillips curve" approaches, The former is inherently defective, it is argued, while the latter has yet to be satisfactorily implemented. Indeed, implementation that is not open to Lucas-critique weaknesses is not in sight. In response to the implied dilemma for policy makers, the paper describes a rule for the conduct of monetary policy that relies upon minimal understanding of price-adjustment dynamics and which should be robust to regulatory and technological change In the economy's financial and payments institutions. A bit of evidence is presented to suggest that the rule would, if adopted, lead to approximately zero inflation (on average) and to output/employment fluctuations that are small by historical standards.. Possible criticisms relating to recent European experience and to recent theoretical developments are considered.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2520.

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Date of creation: Feb 1988
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Publication status: published as McCallum, Bennett T. "The Role of Demand Management in the Maintenance of Full Employment." from Keynes and Economic Policy, ed. by Walter Eltis and Peter Sinclair, Macmillan: London, 1989.
Handle: RePEc:nbr:nberwo:2520

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  1. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  2. McCallum, Bennett T, 1980. "Hahn's Theoretical Viewpoint on Unemployment: A Comment," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 47(187), pages 299-303, August.
  3. Blanchard, Olivier Jean, 1990. "Why does money affect output? A survey," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 15, pages 779-835 Elsevier.
  4. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(2), pages 241-54, April.
  5. McCallum, Bennett T, 1986. "On "Real' and "Sticky-Price' Theories of the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 18(4), pages 397-414, November.
  6. Barro, Robert J, 1979. "Second Thoughts on Keynesian Economics," American Economic Review, American Economic Association, vol. 69(2), pages 54-59, May.
  7. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June.
  8. Bennett T. McCallum, 1987. "Inflation: Theory and Evidence," NBER Working Papers 2312, National Bureau of Economic Research, Inc.
  9. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  10. McCallum, Bennett T, 1984. "Monetarist Rules in the Light of Recent Experience," American Economic Review, American Economic Association, vol. 74(2), pages 388-91, May.
  11. McCallum, Bennett T, 1983. "The Liquidity Trap and the Pigou Effect: A Dynamic Analysis with Rational Expectations," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 50(200), pages 395-405, November.
  12. Barro,Robert J. & Grossman,Herschel I., 2008. "Money Employment and Inflation," Cambridge Books, Cambridge University Press, number 9780521068659, 9.
  13. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 173-203, January.
  14. Willem H. Buiter, 1987. "The Right Combination of Demand and Supply Policies: The Case for a Two-Handed Approach," NBER Working Papers 2333, National Bureau of Economic Research, Inc.
  15. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
  16. Robert J. Gordon, 1983. "The Conduct of Domestic Monetary Policy," NBER Working Papers 1221, National Bureau of Economic Research, Inc.
  17. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 39-69, February.
  18. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  19. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  20. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
  21. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(5), pages 823-38, Supp..
  22. Meltzer, Allan H, 1987. "Limits of Short-run Stabilization Policy: Presidential Address to the Western Economic Association, July 3, 1986," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 25(1), pages 1-14, January.
  23. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
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Cited by:
  1. Issing, Otmar, 2013. "A new paradigm for monetary policy?," CFS Working Paper Series 2013/02, Center for Financial Studies (CFS).

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