Book contents
- Frontmatter
- Contents
- Preface
- Part I Introduction and main assumptions
- Part II The impact of monetary policy and inflation
- Part III The impact of monetary regimes
- 9 Centralised wage formation
- 10 Fiscal policy
- 11 Price stability goal
- 12 Uncertainty concerning policy formation
- 13 Policy uncertainty in a fixed-but-adjustable exchange rate regime
- 14 The impact of uncertainty on wage setting
- Part IV Policy implications
- Appendix: Microeconomic foundations
- Bibliography
- Index
10 - Fiscal policy
Published online by Cambridge University Press: 22 September 2009
- Frontmatter
- Contents
- Preface
- Part I Introduction and main assumptions
- Part II The impact of monetary policy and inflation
- Part III The impact of monetary regimes
- 9 Centralised wage formation
- 10 Fiscal policy
- 11 Price stability goal
- 12 Uncertainty concerning policy formation
- 13 Policy uncertainty in a fixed-but-adjustable exchange rate regime
- 14 The impact of uncertainty on wage setting
- Part IV Policy implications
- Appendix: Microeconomic foundations
- Bibliography
- Index
Summary
Introduction
This chapter examines natural unemployment and inflation in a model setting corresponding to Kydland and Prescott (1977) and Barro and Gordon (1983a) where the wage setters fix the nominal wage through contracts and form correct expectations regarding the authorities' sub-sequent policy setting. Contrary to the analysis in Kydland and Prescott and Barro and Gordon, it is assumed that the wage setters set the nominal wage to reach an optimal trade-off between the real wage and employment. The authorities have at their disposal not only monetary policy but also fiscal policy. Fiscal policy affects the combinations of the real wage and employment which can be reached by the wage setters, and thus the natural unemployment, through a terms-of-trade effect and – in the case of changes in taxation of labour income – through a direct impact on the real disposable wage.
The analysis demonstrates as a new finding that natural unemployment is determined by the monetary regime. This conclusion of natural unemployment being affected by the monetary regime has important policy implications. Based on a model with no stochastic shifts in economic structure, it is no longer possible to claim, as in the models based on Kydland and Prescott and Barro and Gordon, that it is unambiguously desirable to give up the possibility of using monetary policy, for example by establishing an independent central bank.
- Type
- Chapter
- Information
- Money and the Natural Rate of Unemployment , pp. 183 - 202Publisher: Cambridge University PressPrint publication year: 2000