Book contents
- Frontmatter
- Dedication
- Contents
- Illustrations
- Abbreviations
- Foreword
- Preface and Acknowledgments
- Executive Summary
- Chapter 1 What Is Inclusive Growth?
- Chapter 2 What Is the Main Constraint that Developing Countries Face?
- Chapter 3 Why Full Employment and Who Should Be Responsible for Trying to Achieve It?
- Chapter 4 Why Is Growth Unstable?
- Chapter 5 What Is the Role of Agriculture in the Process of Structural Change and in Delivering Full Employment? Full Employment I
- Chapter 6 What Is the Role of Investment in Delivering Full Employment? Full Employment II
- Chapter 7 Why Is “Planning Development” Necessary?
- Chapter 8 What Is Industrial Policy? Full Employment III
- Chapter 9 Structural Transformation, Industrialization, and Technological Change in Developing Asia: What Does the Empirical Evidence Show?
- Chapter 10 Why Do Export Diversification and Sophistication Matter?
- Chapter 11 Unemployment Versus Inflation: Which One Should Be the Public Enemy Number One?
- Chapter 12 What Should Be the Role of Fiscal and Monetary Policies for Development? Full Employment IV
- Chapter 13 Is It Possible to Achieve Full Employment in the Presence of Structural Transformation?
- Chapter 14 Should the Government (Public Sector) Intervene Directly and Become the Employer of Last Resort? Full Employment V
- Chapter 15 Can Competitiveness and Globalization Deliver Inclusiveness and Full Employment?
- Chapter 16 Export-Led Growth or Domestic Demand–Led Growth?
- Chapter 17 Is Education a Key Ingredient of Inclusive Growth?
- Chapter 18 Conclusions: How Can Developing Countries Implement an Inclusive-Growth and Full-Employment Strategy?
- References
- Author Index
- Subject Index
Chapter 12 - What Should Be the Role of Fiscal and Monetary Policies for Development? Full Employment IV
Published online by Cambridge University Press: 10 September 2020
- Frontmatter
- Dedication
- Contents
- Illustrations
- Abbreviations
- Foreword
- Preface and Acknowledgments
- Executive Summary
- Chapter 1 What Is Inclusive Growth?
- Chapter 2 What Is the Main Constraint that Developing Countries Face?
- Chapter 3 Why Full Employment and Who Should Be Responsible for Trying to Achieve It?
- Chapter 4 Why Is Growth Unstable?
- Chapter 5 What Is the Role of Agriculture in the Process of Structural Change and in Delivering Full Employment? Full Employment I
- Chapter 6 What Is the Role of Investment in Delivering Full Employment? Full Employment II
- Chapter 7 Why Is “Planning Development” Necessary?
- Chapter 8 What Is Industrial Policy? Full Employment III
- Chapter 9 Structural Transformation, Industrialization, and Technological Change in Developing Asia: What Does the Empirical Evidence Show?
- Chapter 10 Why Do Export Diversification and Sophistication Matter?
- Chapter 11 Unemployment Versus Inflation: Which One Should Be the Public Enemy Number One?
- Chapter 12 What Should Be the Role of Fiscal and Monetary Policies for Development? Full Employment IV
- Chapter 13 Is It Possible to Achieve Full Employment in the Presence of Structural Transformation?
- Chapter 14 Should the Government (Public Sector) Intervene Directly and Become the Employer of Last Resort? Full Employment V
- Chapter 15 Can Competitiveness and Globalization Deliver Inclusiveness and Full Employment?
- Chapter 16 Export-Led Growth or Domestic Demand–Led Growth?
- Chapter 17 Is Education a Key Ingredient of Inclusive Growth?
- Chapter 18 Conclusions: How Can Developing Countries Implement an Inclusive-Growth and Full-Employment Strategy?
- References
- Author Index
- Subject Index
Summary
None of the post war expansions died of old age. They were all murdered by the Fed.
—R. Dornbusch, late Massachusetts Institute of Technology professor (quoted in The Economist [2007, 76]).In this chapter, I discuss the roles of fiscal and monetary policies in achieving full employment. These two are the main tools that governments have at hand to achieve this objective. I start with a discussion of fiscal policy and budget deficits and address the widely held belief that budget deficits cause inflation, lead to increases in interest rates, and crowd out private investment. I move in the following section to a discussion of monetary policy and the evidence of the role of interest rates in stimulating investment and averting inflation. In this chapter, I argue that governments and central banks have powerful tools to contribute to full employment. In fact, failure to understand how these tools operate in modern economies is an important reason for pervasive involuntary unemployment.
For a long time, economists have distinguished between policies for stabilization (short- and medium-term issues) and policies for growth (long-term issues). The tools to stabilize the economy (i.e., to counter- act economic fluctuations) are monetary and fiscal policies that focus on aggregate demand. Some economists think that these have no impact on long-run growth (i.e., the neutrality-of-money proposition). Growth policy, on the other hand, concentrates on aggregate supply. This artificial division of areas (and policies), however, is not shared by other economists. In the words of Stiglitz et al. (2006, 245): “Stabilization policy cannot be separated from growth policy. Failure to stabilize may hurt growth, but stabilization, in the traditional sense of the term (price stability and fiscal adjustment), does not necessarily lead to economic growth.” Indeed, after the financial crises of the 1990s, many developing countries sacrificed their long-run growth potential to show fiscal discipline. Ball (1999) and Blanchard (2002) have argued that monetary and fiscal policies affect both short- and long-run trends in unemployment. And most likely, changes in aggregate demand permanently affect potential output. In a world where prices adjust slowly to equilibrium following a shock, the argument that economic policy is ineffective need not be true, especially in the presence of unemployment. This slow-adjustment scenario is particularly realistic in the labor market because of the conflict between firms and workers over the distribution of income.
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- Inclusive Growth, Full Employment, and Structural ChangeImplications and Policies for Developing Asia, pp. 189 - 226Publisher: Anthem PressPrint publication year: 2010