Double 'Dividend' or Double 'Function' of Labour Market Reforms under Discretionary Monetary Policy? A Note on the Calmfors-Model
A high natural rate of unemployment has been identified by the time inconsistency literature as the root cause of an inflation bias. Thus, a reduction of equilibrium unemployment and of the inflation bias requires fundamental reforms of labour market institutions. However, there has been little research on how participation in different monetary regimes affects incentives in favour of them. Here an extended Barro-Gordon model is used where monetary policy and the reforms are determined simultaneously. Impacts of different monetary regimes on labour markets crucially depend on the degree of the inflation bias and on the extent of its internalisation by national governments. However, some opponents to a monetary rule hold the prior that a monetary rule serves a s substitute for labour-market reform. Therefore, it does not lower unemployment significantly and leads to lower welfare than discretionary policy. This view is clearly rejected by our model. It is shown that a monetary rule generally leads to a higher total economy welfare than discretionary policy. Under the latter, an overshooting of reforms can be observed because reforms are needed more pressingly and a monetary rule is a superior (and ideally perfect) instrument to internalise the inflation bias.
Volume (Year): 219 (1999)
Issue (Month): 5+6 (November)
|Contact details of provider:|| Postal: Licher Straße 74, 35394 Gießen|
Phone: +49 (0)641 99 22 001
Fax: +49 (0)641 99 22 009
Web page: http://wiwi.uni-giessen.de/home/oekonometrie/Jahrbuecher/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:jns:jbstat:v:219:y:1999:i:5-6:p:543-555. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Winker)
If references are entirely missing, you can add them using this form.