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The role of demand management policies in reducing unemployment

  • Charles R. Bean

This paper considers the scope for demand management policies to reduce the present high levels of European unemployment. While the evidence suggests that contractionary demand shocks are partly to blame, the presence of endogenous persistence mechanisms limit the scope for effective activist policies. Furthermore, in isolation they can do nothing to tackle the significant fraction due to adverse supply, or structural, developments. However, if appropriate supply-side policies are introduced, supportive demand management policies can speed the reduction in unemployment. The paper considers what such supportive demand management policies should look like and argues that in some cases a mild, although temporary, increase in inflation may be appropriate. The implications of uncertainty about the equilibrium rate of unemployment are also considered. The paper argues that such supportive policies are probably best sustained through monetary rather than fiscal policies and are likely to require changes in intra-European real exchange rates. Consequently a rapid move to full monetary union may be ill advised. Finally a potential role for temporary incomes policies is also identified.

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File URL: http://www.kansascityfed.org/publicat/sympos/1994/s94bean.pdf
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Article provided by Federal Reserve Bank of Kansas City in its journal Proceedings - Economic Policy Symposium - Jackson Hole.

Volume (Year): (1994)
Issue (Month): Jan ()
Pages: 99-167

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Handle: RePEc:fip:fedkpr:y:1994:i:jan:p:99-167
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  1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, March.
  2. Olivier Jean Blanchard & Peter Diamond, 1990. "Ranking, Unemployment Duration, and Wages," NBER Working Papers 3387, National Bureau of Economic Research, Inc.
  3. Meade, James E., 1977. "The Meaning of "Internal Balance"," Nobel Prize in Economics documents 1977-2, Nobel Prize Committee.
  4. Frankel, Jeffrey A & Rockett, Katharine E, 1988. "International Macroeconomic Policy Coordination When Policymakers Do Not Agree on the True Model," American Economic Review, American Economic Association, vol. 78(3), pages 318-40, June.
  5. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  6. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-19, December.
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