Monetary Policy and Unemployment This book pulls together papers presented at a conference in honor of the 1981 Nobel Prize Winner for Economic Science, the late James Tobin. Among the contributors are Masanao Aoki (UCLA), Olivier Blanchard (MIT), Edmund Phelps (Columbia University), Charles Goodhart (LSE), Marco Buti (European Commission), Hiroshi Yoshikawa (Tokyo University and BoJ), Athanasios Orphanides (Fed, US), and Jerome Henry (ECB). Written in the spirit of the long time Yale Professor, James Tobin, who has held the view that monetary policy is not neutral, this volume provides an analysis of the different economic performances exhibited by the USA, the Euro-area, and Japan in the last decade. Through addressing the potential role monetary policy has on economic growth and unemployment, this book also discusses the new policy rules that, perhaps, should have been and should be used in the future to improve the economic performance of the three regions. This book will be of great interest to both undergraduate and graduate economic students, academics, and practitioners. Willi Semmler is Professor of Economics at the New School University, New York, and the Center for Empirical Macroeconomics at Bielefeld University. Routledge international studies in money and banking 1 Private Banking in Europe Lynn Bicker 2 Bank Deregulation and Monetary Order George Selgin 3 Money in Islam A study in Islamic political economy Masudul Alam Choudhury 4 The Future of European Financial Centres Kirsten Bindemann 5 Payment Systems in Global Perspective Maxwell J. Fry, Isaak Kilato, Sandra Roger, Krzysztof Senderowicz, David Sheppard, Francisco Solis, and John Trundle 6 What is Money? John Smithin 7 Finance A characteristics approach Edited by David Blake 8 Organisational Change and Retail Finance An ethnographic perspective Richard Harper, Dave Randall, and Mark Rouncefield 9 The History of the Bundesbank Lessons for the European Central Bank Jakob de Haan 10 The Euro A challenge and opportunity for financial markets Published on behalf of Société Universitaire Européenne de Recherches Financières (SUERF) Edited by Michael Artis, Axel Weber, and Elizabeth Hennessy 11 Central Banking in Eastern Europe Nigel Healey 12 Money, Credit and Prices Stability Paul Dalziel 13 Monetary Policy, Capital Flows and Exchange Rates Essays in memory of Maxwell Fry Edited by William Allen and David Dickinson 14 Adapting to Financial Globalisation Published on behalf of Société Universitaire Européenne de Recherches Financières (SUERF) Edited by Morten Balling, Eduard H. Hochreiter, and Elizabeth Hennessy 15 Monetary Macroeconomics A new approach Alvaro Cencini 16 Monetary Stability in Europe Stefan Collignon 17 Technology and Finance Challenges for financial markets, business strategies and policy makers Published on behalf of Société Universitaire Européenne de Recherches Financières (SUERF) Edited by Morten Balling, Frank Lierman, and Andrew Mullineux 18 Monetary Unions Theory, history, public choice Edited by Forrest H. Capie and Geoffrey E. Wood 19 HRM and Occupational Health and Safety Carol Boyd 20 Central Banking Systems Compared The ECB, the pre-Euro Bundesbank and the Federal Reserve System Emmanuel Apel 21 A History of Monetary Unions John Chown 22 Dollarization Lessons from Europe and the Americas Edited by Louis-Philippe Rochon and Mario Seccareccia 23 Islamic Economics and Finance: A Glossary, 2nd Edition Muhammad Akram Khan 24 Financial Market Risk Measurement and analysis Cornelis A. Los 25 Financial Geography A Banker’s view Risto Laulajainen 26 Money Doctors The experience of international financial advising 1850–2000 Edited by Marc Flandreau 27 Exchange Rate Dynamics A new open economy macroeconomics perspective Edited by Jean-Oliver Hairault and Thepthida Sopraseuth 28 Fixing Financial Crises in the 21st Century Edited by Andrew G. Haldane 29 Central Banking in Eastern Europe Edited by Nigel Healey and Barry Harrison 30 Exchange Rates, Capital Flows and Policy Edited by Peter Sinclair, Rebecca Driver, and Christoph Thoenissen 31 Monetary Policy and Unemployment The US, Euro-area, and Japan Edited by Willi Semmler Monetary Policy and Unemployment The US, Euro-area, and Japan Edited by Willi Semmler !l Routledge ~ ~ Taylor & Francis Group LONDON AND NEW YORK This project was generously supported by the Bernard Schwartz Center for Economic Policy Analysis at New School University First published 2005 by Routledge Published 2017 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © 2005 Willi Semmler for selection and editorial matters; individual chapters, the contributors Typeset in Baskerville MT by Newgen Imaging Systems (P) Ltd, Chennai, India The Open Access version of this book, available at www.tandfebooks.com, has been made available under a Creative Commons Attribution-Non Commercail-No Derivatives 4.0 license. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Monetary policy and unemployment: the US, Euro-area, and Japan/ edited by Willi Semmler. p. cm. Papers presented at a conference hosted by the Economics Dept. and the Center for Economic Policy Analysis of the New School University held from Nov. 22–23, 2002. Includes bibliographical references and index. 1. Monetary policy—United States—Congresses. 2. Monetary policy—European Union countries—Congresses. 3. Monetary policy—Japan—Congresses. 4. Unemployment—United States— Congresses. 5. Unemployment—European Union countries—Congresses. 6. Unemployment—Japan—Congresses. I. Semmler, Willi. II. New School Universiy. Economics Dept. III. New School University. Center for Economic Policy Analysis. HG540.M659 2005 331.13Ј7–dc22 2004013132 ISBN 978-0-415-70087-0 (hbk) Contents List of contributors ix 1 Introduction 1 WILLI SEMMLER PART I Overview: unemployment and monetary policy in the three currency areas 7 2 Monetary policy and unemployment 9 OLIVIER BLANCHARD 3 Some notes on monetary policy and unemployment 16 EDMUND PHELPS 4 The long stagnation of the Japanese economy during the 1990s and macroeconomic policies 20 HIROSHI YOSHIKAWA PART II Labor market institutions and unemployment 23 5 The role of shocks and institutions in the rise of European unemployment: the aggregate evidence 25 OLIVIER BLANCHARD AND JUSTIN WOLFERS 6 Labor market institutions and unemployment in Europe: a comment on Blanchard and Wolfers 57 DAVID R. HOWELL viii Contents 7 Labor market dynamics in the Euro-area: a model-based sensitivity analysis 64 ALISTAIR DIEPPE, JÉRÔME HENRY, AND PETER McADAM PART III Structuralist causes of unemployment and monetary policy 105 8 The structuralist perspective on real exchange rate, share price level, and employment path: what room is left for money? 107 HIAN TECK HOON, EDMUND PHELPS, AND GYLFI ZOEGA 9 The long stagnation and monetary policy in Japan: a theoretical explanation 133 MASANAO AOKI, HIROSHI YOSHIKAWA, AND TOSHIHIRO SHIMIZU 10 Monetary policy, the labor market, and pegged exchange rates: a study of the German economy 166 PETER FLASCHEL, GANG GONG, AND WILLI SEMMLER PART IV Monetary policy rules, fiscal policy, and unemployment 205 11 The constitutional position of the Central Bank 207 CHARLES GOODHART 12 Activist stabilization policy and inflation: the Taylor rule in the 1970s 218 ATHANASIOS ORPHANIDES 13 The Fed’s monetary policy rule: past, present, and future 238 ANTONIO MORENO 14 What is the impact of tax and welfare reforms on fiscal stabilizers? A simple model and an application to EMU 252 MARCO BUTI AND PAUL VAN DEN NOORD Index 272 Contributors Masanao Aoki is Emeritus Professor of Economics with the Department of Economics, University of California, Los Angeles and also visiting researcher of the Center for International Research on Japanese Economy, University of Tokyo. Olivier Blanchard belongs to the Class of 1941 and is Professor of Economics, at the Massachusettes Institute of Technology, Cambridge, MA. Marco Buti is Director of the Economies of the Member States at the European Commission, and Lecturer on Monetary and Fiscal Policies in EMU at the Université Libre de Bruxelles. Alistair Dieppe is an Economist in DG Research at the European Central Bank. Peter Flaschel is Professor of Economics at the University of Bielefeld. He is currently working in the area of Macrodynamics, in particular, on real–financial market interactions with Carl Chiarella, Willi Semmler and Reiner Franke as co-authors. Gang Gong is Associate Professor at the School of Economics and Management in Tsinghua University, Beijing. Charles Goodhart is the Deputy Director of the Financial Markets Group and Emeritus Professor of Economics at the London School of Economics. Jérôme Henry is an Advisor in charge of Forecast Coordination in DG Economics at the European Central Bank. Hian Teck Hoon is Associate Professor at Singapore Management University. David R. Howell is Professor of Economics and the Academic Dean at the Milano Graduate School, New School University, New York. He is also a Research Associate at the New School’s Bernhard Schwartz Center for Economic Policy Analysis (CEPA). Peter McAdam is Senior Economist in DG Research at the European Central Bank. x Contributors Antonio Moreno is Assistant Professor at the Economics Department in the Universidad de Navarra, Spain. Paul Van den Noord is Senior Economist