It is widely agreed that the natural unemployment rate recovered strongly in several OECD economies in the 1990s while not yet in the others. This paper draws on models by the authors endogenizing the path of the natural rate in order to trace the causes and apportion the credit. The results suggest that the five structural reforms of the labor market urged by the OECD Secretariat were effective and account for some of the recovery where adopted. However, the paper sees most of the recoveries as largely the emergence from structural slump to a structural boom--a boom brought by revived investment in employees, customers and fixed capital. Behind this revival is a recovery of business-asset valuations resulting from improved expectations for productivity growth and, judging by the stock market, hopes for a future lift in business earnings that exceeds extrapolations of the past--both driven by the "new economy."

/pdf/roots-of-the-recent-recoveries-labor-reforms-or-private-o73m2vexi9.pdf

Roots of the Recent Recoveries: Labor Reforms or Private Sector Forces?

The benefits of an international division of labour is never illustrated more clearly than in small developed nations like Denmark. Without many natural resources such countries can never be self sufficient and they need access to foreign markets in order for their firms to specialise and utilize economics of scale. The specialisation chosen is mainly in low-tech goods, where the risk of sudden domestically damaging changes in technology or demand are relatively small. Besides such general features of small developed nations, the Danish case has some special characteristics, which distinguishes it from many other nations and regions. One important feature is the century-old, deep-rooted egalitarian beliefs of the society which during the last century has intermixed with the growth of the public sector in shaping not only the welfare state, but also a strongly consensus-seeking political system - the negotiated economy - incorporating all major groups in the economy. Recently, the development towards a knowledge based world economy has increased the importance of another feature with an small egalitarian country: the kind of trust-relations, that come into existence, when everyone in an industry has known everybody else through many years. The international industrial competitiveness of the country's vast majority of small, export oriented firms are not only favoured by a reasonable adequate macro-economic policy but further enhanced by the ease in the exchange of information resulting from established trust-relations.

/pdf/learning-in-the-village-economy-of-denmark-the-role-of-2ln73za76k.pdf

Learning in the village economy of Denmark. The role of institutions and policy in sustaining competitiveness

The notion of targets and instruments is basic to the conceptual framework that economists have used to bring economic analysis to bear on practical issues of how central banks can and/or should conduct monetary policy. This paper surveys the literature of targets and instruments of monetary policy, focusing primarily on the progression of analytical developments during the past two decades. The two issues that have been most central to this entire line of research are the "instrument problem" -- what price or quantity the central bank should fix directly through its open market operations -- and the "intermediate target problem" -- what role (if any) the central bank should assign to variables that it cannot set directly but over which it can exert substantial influence (the most obvious example, of course, being the money stock). Other issues that have figured prominently in this literature include how best to control money growth, should the central bank choose to do so; the potential role of money, credit, and other financial variables as sources of information that might guide the central bank's operations; the implications of alternative policy frameworks for the information available to the economy's private sector; the positive empirical question of determining when and whether any given central bank has actually based its operations on one kind of targeting strategy or another; and the empirical basis for making normative choices among different targets and instruments. The survey concludes by drawing connections to some broader issues, including rules versus discretion and activism versus nonresponsivenless, as well as to the long-standing issue "why money?'

Targets and Instruments of Monetary Policy

The NAIRU (non-accelerating inflation rate of unemployment) theory has become the mainstream theory in explaining unemployment in Europe and is often used to justify demands for a cutback of the welfare state, such as reducing unemployment benefits. Close inspection reveals that it, perhaps surprisingly, shares some arguments with Post Keynesian and even Marxist theory. The paper proposes an underdetermined, encompassing NAIRU model, which is consistent with several theoretical traditions. Depending on the closure with respect to demand formation and determination of the NAIRU itself, the model allows for New Keynesian, Post Keynesian and Marxist results.

https://papers.ssrn.com/sol3/Delivery.cfm/meca_314.pdf?abstractid=1142054&mirid=5

Is the NAIRU theory a monetarist, new keynesian, post keynesian or a marxist theory?

Politics and Fed policymaking: The more things change the more they remain the same

European currency markets have been subject to recurring periods of turmoil since the summer of 1992. In the first wave of turmoil in September of 1992, the United Kingdom and Italy withdrew their currencies from the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). In the second wave of turmoil in August of 1993, the ERM temporarily suspended the narrow bands within which exchange rates of remaining ERM currencies were allowed to fluctuate. Understanding the reasons for the ERM crisis is essential for predicting the future course of European economic, financial, and political developments-all of which could affect the U.S. economy into the 21st century. According to one interpretation, the ERM crisis was caused by a combination of bad luck and bad policy decisions. This interpretation was offered by monetary officials in Europe in their analysis of the reasons for ERM turmoil in 1992 (European Community, Monetary Committee). The bad luck was the timing of the large external shock to European economies resulting from German unification and monetary union in 1990. This shock imposed severe strains on European economies and thus on the ERM because it led to a divergence between the policy priorities in Germany and those in other EMS countries. These strains were exacerbated by inappropriate macroeconomic policy decisions that contributed to high inflation and budget deficits in some EMS countries--especially the United Kingdom and Italy. This interpretation of the ERM crisis leads to a relatively sanguine view that only minor modifications to the ERM system will allow a return to exchange rate stability as a step toward full monetary union in the European Community (EC) by the end of this decade, as envisioned in the Maastricht Treaty. More skeptical analysts offer a much less sanguine interpretation of the crisis. They view the ERM as fundamentally flawed. Although not denying that German unification and unsound macroeconomic policies contributed to strains within the ERM, these analysts stress that the design of the system made it particularly vulnerable to such disruptive factors. Fundamental systemic changes would thus be required to achieve either exchange rate stability as a precursor to monetary union within the EMS. The purpose of this article is to evaluate the reasons for the ERM crisis and the changes necessary to prevent a recurrence. The first section describes why Europeans want exchange rate stability and how they tried to achieve that goal before the new ERM evolved in the late 1980s. The second section analyzes the reasons the new ERM was vulnerable and how that vulnerability, while not making the crisis inevitable, nonetheless made the system susceptible to crisis. The final section evaluates prospective changes that might be necessary to reduce the vulnerability of the ERM. DESIRE FOR EUROPEAN INTEGRATION AND EXCHANGE RATE STABILITY The ERM crisis has led some to question whether exchange rate stability leading ultimately to monetary union is a feasible goal. Yet most European political leaders continue to express their determination to achieve that goal as soon as possible. This determination grows out of a long standing desire in Western Europe for greater economic, monetary, and political integration. The specific contribution of the ERM was intended to be greater stability of exchange rates among the currencies of EC countries. Why Europeans want stable exchange rates Europeans have a long history of trying to stabilize the exchange rates between their national currencies. Exchange rate stability is considered critical by member states of the EC for two reasons: 1) a history of exchange rate instability has led to economic hardship and social disruption, and 2) trade is important for economic performance. The history of exchange rate instability in 1920s and 1930s has had an enduring effect on Europeans' perspective. Whereas exchange rates had been stable and European economies had prospered under the international gold standard in the third of a century leading up to World War I, exchange rate instability in the interwar period was accompanied by recurring financial crises and extreme economic hardship in Europe and elsewhere. …

Was the ERM Crisis Inevitable

Monetary growth has proven to be somewhat disappointing in recent years as a guide for conducting the Federal Reserve's monetary policy. Growth of the narrow aggregate, M1, became increasingly unreliable in the 1980s as an indicator of the future course of the economy and inflation. As a result, the FOMC de-emphasized M1 growth and eventually discontinued its use altogether. Since then, the broader M2 measure of money has been the preeminent variable used in implementing monetary policy. Unfortunately, M2 has also become unreliable over the last two years. The growth of M2 in the 1990s has been much slower than can be explained by traditional relationships to income and interest rates. The M2 slowdown has resulted in part from special factors that have overshadowed traditional relationships. If such factors are merely temporary, M2 growth may soon return to a more normal relationship with the goals of monetary policy. Most analysts have implicitly assumed this would be the case. But what if M2 growth remains unreliable for several more years? Worse yet, what if its properties have become so altered that M2 will never again be predictably related to policy goals? The Federal Reserve would then be forced to reassess the framework for implementing monetary policy. This article argues that the erratic behavior of M2 in recent years is symptomatic of fundamental changes likely to continue impairing the usefulness of M2 as a policy guide. As a result, the Federal Reserve will probably need to reassess the framework for conducting monetary policy. The first section reviews the history of using monetary growth rates in the conduct of monetary policy. The next section reviews empirical evidence to determine what has caused the slowing of M2 growth in recent years. The final section evaluates the extent to which persistence of these factors will continue to diminish the usefulness of M2 in the conduct of policy. MONETARY AGGREGATES AND MONETARY POLICY The Federal Reserve has used various monetary aggregates over the years in the conduct of monetary policy. The role played by the aggregates has also varied depending on circumstances. At times, a monetary aggregate has approached the status of an intermediate target that is the focal point of policy actions. At other times, one or more aggregates have been the preeminent variable among the many that provide information about the economy or inflation. To fully appreciate the quandary resulting from the recent puzzling behavior of M2, it is useful to review the history of using monetary growth in the implementation of monetary policy. INTERMEDIATE TARGET OR INFORMATION VARIABLE There is considerable confusion about the role monetary aggregates should play--even about the role they have played--in the conduct of policy. Part of this confusion stems from lack of precision in terminology. The distinction between intermediate target variable and information variable is particularly critical for understanding what properties are desirable for a monetary aggregate used in the conduct of policy. An intermediate target is a variable that can be controlled so as to achieve the desired policy goals. To serve this role, a variable must first be reliably related to the goal variables of monetary policy, which can usefully be summarized by the growth rate of nominal income. For a monetary aggregate serving as a policy target, the ratio of income to the aggregate--its velocity--must be predictable. In the simplest of all cases, velocity would be constant and nominal income would grow at the same rate as the money stock. Keeping the money stock growing at a constant rate would ensure that nominal income would grow at the same rate. This points up the second requirement for a target variable, its controllability. A target variable need not itself be subject to direct control, but it must be strongly and predictably influenced by the policy instruments that can be directly controlled. …

Policy Implications of Recent M2 Behavior

Reducing unemployment has become a top priority for economic policy in most industrialized nations. While unemployment will ebb somewhat as countries recover from the recent global recession, millions are likely to remain jobless for a variety of structural reasons. Moreover, there is a disturbing trend in many industrialized countries toward long-term unemployment, especially among low-skilled workers. This trend has had less effect on measured unemployment in the United States than in Europe in part because U.S. workers have greater incentives to accept low-wage jobs. Nonetheless, virtually all industrial countries face a jobs problem that impairs living standards and threatens a breakdown in social cohesion.> To enhance understanding of what has caused this problem and to analyze policies to address it, the Federal Reserve Bank of Kansas City invited central bankers, academics, and economists to a symposium entitled "Reducing Unemployment: Current Issues and Policy Options." The symposium was held August 25-27, 1994, at Jackson Hole, Wyoming. Higgins highlights the issues raised at the symposium and summarizes the papers and commentary.

Bryon Higgins

Papers

Was the ERM Crisis Inevitable

Policy Implications of Recent M2 Behavior

Reducing unemployment: current issues and policy options: a summary of the Bank's 1994 symposium

Is a recession inevitable this year

Should the Federal Reserve fine tune monetary growth