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Macroeconomic Policy in the Presence of Structural Maladjustment

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  • Robert J. Gordon

Abstract

This paper analyzes two-way interactions between structural reform and macro policy. If structural reforms increase the flexibility of labor markets, they are likely to improve the short-run inflation-unemployment tradeoff, providing an incentive for policymakers to expand aggregate demand. Also, policymakers' promises that they will encourage a decline in unemployment in response to good news on inflation can be used to strike a political deal with interests opposed to the introduction or extension of structural reform. Expansionary monetary policy also gives relief on the fiscal front 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 1992-93 several European countries dropped out of the ERM to pursue more expansionary monetary policies. The difference in the results of these countries and those countries which maintained a peg between their currencies and the Deutschemark provides a test case of the consequences of expansionary monetary policy. The depreciating nations by 1995 enjoyed a relative acceleration of nominal GDP and 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5739.

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Date of creation: Sep 1996
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Publication status: published as macroeconomic policy and structural reform (paris:oecd, 1996"),pp. 173-204.
Handle: RePEc:nbr:nberwo:5739

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  1. William H. Branson & Julio J. Rotemberg, 1991. "International Adjustment with Wage Rigidity," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 13-44 National Bureau of Economic Research, Inc.
  2. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
  3. Rod Cross, 2000. "Hysteresis and Emu," Metroeconomica, Wiley Blackwell, vol. 51(4), pages 367-379, November.
  4. Gordon, Robert J, 1995. "Is There a Trade-off between Unemployment and Productivity Growth?," CEPR Discussion Papers 1159, C.E.P.R. Discussion Papers.
  5. De Grauwe, Paul, 1995. "The Economics of Convergence towards Monetary Union in Europe," CEPR Discussion Papers 1213, C.E.P.R. Discussion Papers.
  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. 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.
  2. Berthold, Norbert & Fehn, Rainer, 2000. "Arbeitsmarktpolitik in der Europäischen Währungsunion," Wirtschaftswissenschaftliche Beiträge 38, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
  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. 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.
  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. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
  7. Dobrescu, Emilian, 2006. "Macromodel of the Romanian market economy (version 2005)," MPRA Paper 35749, University Library of Munich, Germany.
  8. 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.
  9. Calmfors, Lars, 1998. "Unemployment, Labour-Market Reform and Monetary Union," Seminar Papers 639, Stockholm University, Institute for International Economic Studies.
  10. 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.

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