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Macroeconomic Policy in the Presence of Structural Maladjustment

  • Robert J. Gordon

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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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
Date of revision:
Publication status: published as macroeconomic policy and structural reform (paris:oecd, 1996"),pp. 173-204.
Handle: RePEc:nbr:nberwo:5739
Note: EFG
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. C Bean, 1992. "European Unemployment: A Survey," CEP Discussion Papers dp0071, Centre for Economic Performance, LSE.
  2. William H. Branson & Julio J. Rotemberg, 1979. "International Adjustment with Wage Rigidity," NBER Working Papers 0406, National Bureau of Economic Research, Inc.
  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. 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.
  5. Rod Cross, 2000. "Hysteresis and Emu," Metroeconomica, Wiley Blackwell, vol. 51(4), pages 367-379, November.
  6. De Grauwe, Paul, 1995. "The Economics of Convergence towards Monetary Union in Europe," CEPR Discussion Papers 1213, C.E.P.R. Discussion Papers.
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