stabilization policy a reconsideration i introduction in 1936 keynes s general theory explained how fiscal and monetary policy could be used to end depressions since that time no developed country has ever seen a downturn on the scale of the 1930s the general theory was not just a how to book on the avoidance of depressions it was an argument for stabilization policy itself the years since the general theory have seen a revolt against keynesian economics in a revisionist mode milton friedman argued that countercyclical policy cannot affect the average level of unemployment and output robert lucas and thomas sargent 1979 went further contending that it is not only impossible to increase average output it is also impossible to stabilize it more recently lucas 1987 2003 has argued that policies to stabilize output even if effective would yield negligible welfare gains thus stabilization policy should not be a macroeconomic priority lucas s conclusion notwithstanding stabilization policy has long been an explicit or implicit objective of monetary policy in most industrial countries even including those countries with inflation targets the volatility of output has in fact declined in most major industrial countries since the mid 1980s and monetary policy arguably deserves at least partial credit see bernanke 2004 mirroring practice monetary policy research commonly takes it as given that along with price stability stabilization policy the minimization of squared deviations of output around potential is an appropriate policy objective see for example clarida et al 1999 in this article we explore the economic rationale for stabilization as a policy goal concluding that it does in fact deserve high policy priority we survey a large body of literature that critiques the validity of key assumptions in lucas s argument we also offer suggestive evidence that stabilization policy can significantly reduce average levels of unemployment by providing stimulus to demand in circumstances where unemployment is high but underutilization of labor and capital does little to lower inflation a monetary policy that vigorously fights high unemployment should however also be complemented by a policy that equally vigorously fights inflation when it rises above a modest target level the federal reserve act thus wisely enunciated price stability and maximum employment as twin goals for monetary policy ii the case against stabilization policy macroeconomic analysis typically assumes that social welfare depends negatively on both inflation above a modest target level here assumed zero and unemployment above some minimum socially efficient level for example a standard social welfare function is the discounted sum of period losses l sub t of the form see among others barro and gordon 1983 pp 592 93 1 l sub t a u sub t 1 k u sup 2 b pi sup 2 sub t where u sub t and pi sub t are the unemployment and inflation rates in period t and u sup is the natural rate of unemployment the coefficient k is positive reflecting the desirability of unemployment below the natural rate because real economies deviate in many respects from perfect competition the natural rate of unemployment is likely to exceed the socially optimal unemployment rate for example with monopolistic competition goods are underproduced because they are priced above marginal cost so potential output is inefficiently low and equilibrium unemployment is too high standard macroeconomic analysis additionally assumes that inflation is determined by an expectations augmented accelerationist phillips curve of the form 2 pi sub t pi sup e sub t f u sub t u sup epsilon sub t where pi sup e sub t is the expected inflation rate at time t with expectations formed at t 1 and epsilon sub t captures supply shocks to the phillips curve at t

the phillips curve macroeconomic policy and the welfare of canadians a review of the two competing paradigms explaining inflation and unemployment fluctuations singles out the keynesian phillips curve as the clear empirical winner over its classic competitors reestimation of the canadian phillips curve for 1957 90 identifies a sharp structural shift toward a high degree of unemployment hysteresis after 1972 the recent attempt of macropolicy to flatten the aggregate demand curve and limit supply side shock accommodation which aims at lower and more stable inflation is then shown to make unemployment higher and more unstable on average to an extent that is an increasing function of the degree of hysteresis understanding and reducing hysteresis and developing a consensus based incomes policy that has a chance of alleviating the dismal trade off should therefore to top research and policy priorities

on the neutrality of fiscal policy abstract the paper explores the relationships between fiscal policy and real economic activity and prices for the six largest industrialized economies fiscal policy variables are shown to be consistent and rational functions of the behaviour of the economy it is also confirmed that fiscal policy seems to have a consistent impact on subsequent real economic activity and prices when multivariate time series analysis is used to breakdown overall fiscal policy into anticipated and unanticipated components the anticipated components are shown generally to have just as much forecasting ability for subsequently realized economic variables as the unanticipated components this does not appear to be consistent with the implications of pure rational expectations models

an examination of aggregate price uncertainty in four countries and someimplications for real output this stu dy constructs measures of aggregate price uncertainty for four countries canada west germany great britain and the united states and examines the relationship across countries and through time between the inflation rate inflation variability and measures of price uncertainty the results suggest that the higher and more variable inflation of the 1970s increased uncertainty about the aggregate price level in canada great britain and the united states but not west ge rmany and there was a significant negative output effect of aggregate price uncertainty for canada and the united kingdom but not for the united states or west germany copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

wage rigidity in canadian collective bargaining agreements the authors search information on the provisions of 10 947 wage contracts signed in the canadian unionized sector between 1976 and 1999 for evidence of downward nominal wage rigidity the disinclination of wages to fall in nominal dollars below their established level over the sample period real wage reductions were common but nominal wage reductions were rare the probability of downward nominal wage rigidity increased substantially during low inflation periods during such periods apparently there was no reduction in the incidence of real wage cuts but the magnitude of those cuts was modest suggesting a lesser ability of wages to adjust to labor market conditions than at other times

escalators and elevators a phillips curve for keynesians the negatively sloped long run phillips curve remains an issue of contention this paper presents a theoretical model of the phillips curve in which nominal demand growth reduces unemployment caused by stochastic shifts of demand between sectors the model can be understood through the following metaphor keynesian economies are escalator economies in which markets adjust back to equilibrium slowly so that nominal demand growth presents a means of speeding up the escalator process contrastingly new classical economies as set forth by e g lucas 1973 are elevator economies in which adjustment is instantaneous consequently there is no role for nominal demand growth in the adjustment process and to the extent that policy sponsored nominal demand growth is uncertain it may actually disrupt the economy by sending the elevator to the wrong floor

interest rates and the fisher effect in india an empirical study abstract this study throws light on the importance of adjustment lags variability of inflation changes in real income etc in the empirical estimation of fisher hypothesis variability of inflation has a significant negative impact on both short and long term interest rates in a developing economy like india the philips curve effect has not been operative in a developing country

inflation and productivity shocks abstract we examine whether sectoral productivity shock distributions are conditioned by inflation regimes we conclude that this is not the case our results have implications for the literature on downward nominal wage rigidity and on inflation as a labor market lubricant

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

post walrasian and post marxian economics it is widely believed that the failure of the socialist experiment should have had a devastating effect on radical economics yet radical economics is not only alive and well but flourishing years before the official demise of marxist socialism they had broadened their critique of standard economics well beyond the received marxist literature indeed their arguments offered striking parallels with the mainstream critiques of walrasian economics provided by the newly developing strand of thought i shall refer to as information economics in walrasian economics information is free moreover there are no costs associated either with making or enforcing contracts but with imperfect and costly information and incomplete risk markets the field of information economics has established that 1 in general markets are not constrained pareto efficient 2 markets may not clear 3 markets may not exist or when they exist may be thin 4 rents are pervasive and indeed reputation rents are necessary to ensure that high quality products get produced that workers do not shirk and so on 5 even when there are many participants in a market competition may be highly imperfect and 6 the distribution of income matters for economic efficiency

on the optimal inflation rate abstract in our incomplete markets economy households choose portfolios consisting of risky uninsurable capital and money money is a bubble it has positive value even though it yields no payoff the market outcome is constrained pareto inefficient due to a pecuniary externality each individual agent takes the real interest rate as given while in the aggregate it is driven by the economic growth rate which in turn depends on individual portfolio decisions higher inflation due to higher money growth lowers the real interest rate on money and tilts the portfolio choice towards physical capital investment modest inflation boosts growth rate and welfare

the impact of managerial networking intensity and market based strategies on firm growth during institutional upheaval a study of small and medium sized enterprises in a transition economy varying institutional environments provide the foundation for a great deal of international business research yet relatively little empirical work has examined the determinants of small and medium sized enterprise sme growth during institutional upheaval although the importance of sme development for economic transition and growth is widely acknowledged our paper addresses this gap in the literature by examining how the competitive strategies of smes evolve during institutional transitions and assessing the implications for firm growth using data collected from 135 smes in 1993 and 200 smes in 2001 we find that managerial networking intensity i e developing and maintaining relationships that may be used for business purposes declines markedly over time whereas the importance of market based strategies increases managerial networking intensity is strongly associated with firm growth early in the institutional transition process but not later market based strategies are not associated with firm growth in either time period drawing on convergent insights from multiple theoretical perspectives we argue that changes in strategy are concurrently driven by socially constructed norms that legitimize new ways of competing and delegitimize old ones and by knowledge acquisition and learning which provide managers with a more diverse set of tools with which to exercise their strategic choices

wage inflation in the united kingdom in britain there is little agreement on what determines the growth of wages or indeed on whether a stable wage equation exists in this paper i try to clarify matters in two ways first i aim to represent the data generation process as faithfully and accurately as possible while using with a few modifications the criteria for model selection advanced in davidson et al 1978 second i use five different measures of the pressure of demand rather than just picking on one particular measure 2 it may be helpful at this stage to summarize very crudely the argument and results in section ii having first set out the framework for the rest of the analysis which relates to the period 1961 i 1980 iv i modify the standard real wage model by proxying the desired level of real wages by a moving average of the past level of real wages it is found that the coefficient on the prevailing real wage is equal but of opposite sign to that on the desired wage thus in the long run inflation is independent of the level of real wages the pressure of demand and incomes policy dummies are both found to be significant one would have expected that in the long run the rate of growth of earnings at given price inflation and pressure of demand would respond to differences in the rate of growth of productivity but over the sample period there was no evidence of this once we allowed for incomes policy which implies considerable rigidity in the target rate of growth of wages the analysis so far includes no specifically expectational variables in section iii i use some survey data on wage expectations which have the advantage of being based on quantitative responses one rationale for having wage expectations in a wage equation might be that in a world of staggered contracts where workers care about relative wages they will take into account what they expect to happen to the wages of other workers when settling now a two equation model for wages and wage expectations is presented in the subsequent section and in most respects the results confirm our conclusions from the previous sections however the preferred specification obtained here which encompasses much of the earlier work and probably constitutes progress is one that we have some doubts about and will it is hoped form the basis for future research in this area

united kingdom education 1997 2001 this paper reviews the achievements of the labour government s education policy between 1997 and 2001 tony blair claimed that his government would make education a priority the first part of the paper reviews the scale of education spending in relation to the economy at large and within the education budget the second part of the paper looks at the productivity of schools how far have the changes that have affected schools in the past 10 years and in the past 5 years in particular had an impact on the quality of school achievements the paper suggests there have been significant improvements not just on average but especially in the gains made in poor areas and in the least good schools finally the paper discusses the funding of higher education the introduction of income related loans to cover maintenance and up front fees the paper concludes that some serious errors were made in policy design even so the use of the inland revenue as the collection agency was a successful innovation and should be built upon

what did smith mean by the invisible hand the invisible hand is not a power that makes the good of one the good of all and it is not any of a number of other things it is said to be it is simply the inducement a merchant has to keep his capital at home thereby increasing the domestic capital stock and enhancing military power both of which are in the public interest and neither of which he intended smith s exposition discloses how his rhetorical sallies could disfigure his economics confuse his argument for free trade and make him play fast and loose with facts and the ideas of others

the reincarnation of keynesian economics this paper discusses the reemergence of keynesian economics during the past decade it highlights the substantial differences between new keynesian economics and the convictions of early keynesians in particular it points out that new keynesians have adopted many views that were once considered monetarist or classical it concludes that the term keynesian may have outlived its usefulness this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

earnings unemployment and the allocation of time over time since an individual s labour market history can be described by a markov chain in state space it is possible to calculate the steady states it is natural to interpret the steady state proportion in unemployment for a group of identical workers as the natural rate of unemployment for this group i e it is the expected proportion that would be employed if the environment were to remain constant it is shown how the natural rate of unemployment is different for different groups the model is estimated using data from a large u s income maintenance experiment the predictions of the model with some exceptions bear up well to confrontation by data the empirical findings also accord well with existing evidence on cross section studies of labour supply we find that labour force participation rates implied by the estimated models are positively related to earnings for all age sex and race groups as expected we demonstrate that the elasticities of the unemployment rates for all groups with respect to expected wage rates are negative and large in absolute value in the case of adults while the role of the wage in allocation of time is not novel the existing neoclassical labour literature uses static labour supply models to interpret participation rate studies

the history of the phillips curve consensus and bifurcation while the early history of the phillips curve up to 1975 is well known less well understood is the post 1975 fork in the road the left fork developed a theory of policy responses to supply shocks in the context of price stickiness in the non shocked sector its econometric implementation interacts shocks with backward looking inertia the right fork approach emphasizes forward looking expectations that can jump in response to anticipated policy changes the left fork approach is better suited to explaining the postwar us inflation process while the right fork approach is essential for understanding behaviour in economies with unstable macroeconomic environments the history of the phillips curve pc has evolved in two phases before and after 1975 with a widespread consensus about the pre 1975 evolution which is well understood bifurcation begins in 1975 when the pc literature split down two forks of the road with little communication or interaction between the two forks the major contribution of this paper and hence the source of bifurcation in its subtitle is to examine contrast and test the contributions of the two post 1975 forks the pre 1975 history is straightforward and is covered in section i the initial discovery of the negative inflation unemployment relation by phillips popularized by samuelson and solow was followed by a brief period in which policy makers assumed that they could exploit the trade off to reduce unemployment at a small cost of additional inflation then the natural rate revolution of friedman phelps and lucas overturned the policy exploitable trade off in favour of long run monetary neutrality those who had implemented the econometric version of the trade off pc in the 1960s reeled in disbelief when sargent demonstrated the logical failure of their test of neutrality and finally were condemned to the wreckage of keynesian economics by lucas and sargent following the twist of the inflation unemployment correlation from negative in the 1960s to positive in the 1970s the architects of neutrality and the opponents of the keynesian trade off emerged triumphant with two major caveats that their own models based on information barriers were unconvincing and that their core result that business cycles were driven by monetary or price surprises floundered without supporting evidence after 1975 the evolution of the pc literature split in two directions each of which has largely failed to recognize the other s contributions section ii reviews the left fork of the road the revival of the pc trade off in a coherent and integrated dynamic aggregate supply and demand framework that emerged in the late 1970s in econometric tests in theoretical contributions and in intermediate macro textbooks this approach which i have called mainstream is resolutely keynesian because the inflation rate is dominated by persistence and inertia in the form of long lags on past inflation an important difference between the mainstream approach and other post 1975 developments is that the role of past inflation is not limited to the formation of expectations but also includes a pure persistence effect due to fixed duration wage and price contracts and lags between

accounting for intergenerational income persistence noncognitive skills ability and education we analyse in detail the factors that lead to intergenerational persistence among sons where this is measured as the association between childhood family income and later adult earnings we seek to account for the level of income persistence in the 1970 bcs cohort and also to explore the decline in mobility in the uk between the 1958 ncds cohort and the 1970 cohort the mediating factors considered are cognitive skills non cognitive traits educational attainment and labour market attachment changes in the relationships between these variables parental income and earnings are able to explain over 80 of the rise in intergenerational persistence across the cohorts

on inflation and real price variability this paper studies the consequences of costly price adjustments for the variability of real prices accompanying inflation for constant elasticity demand and cost of production it is shown that a higher demand a lower cost of production or a lower cost of price adjustment leads to less intertemporal variability of real prices if the marginal cost of production does not increase too fast then the average real price is less than the real price that would prevail in the absence of inflation additionally a higher demand a lower cost of production or a lower cost of price adjustment leads to a higher level of real prices

the relationship between inflation and inflation uncertainty in the uk 1885 1998 abstract using a long series of uk inflation data i have provided strong evidence in favour of the hypothesis that inflationary periods are associated with high inflation uncertainty this result supports the friedman ball hypothesis and has important implications for the inflation output relationship provided that more inflation uncertainty leads to lower output

a resource based theory of the firm knowledge versus opportunism this paper develops a resource based knowledge based theory of the firm its thesis is that the organizational mode through which individuals cooperate affects the knowledge they apply to business activity we focus on the polar cases of organization within a firm as compared to market contracting there will be a difference in the knowledge that is brought to bear and hence in joint productivity under the two options thus as compared to opportunism based transaction cost theory we advance a separate yet complementary answer to the question why do firms exist our aim is to develop an empirically relevant and complementary theory of why firms are formed a theory based on irreducible knowledge differences between individuals rather than the threat of purposeful cheating or withholding of information we assume limited cognitive abilities on the part of individuals bounded rationality and assume that opportunistic behavior will not occur the latter allows us to determine whether resource based

public inflation aversion and the political economy of macroeconomic policymaking do the macroeconomic priorities of citizens differ across countries if so what accounts for this variation and what are its consequences for explanations of the choice of monetary institutions macroeconomic policy and international monetary cooperation this article uses survey data from twenty advanced economies to examine individual preferences about macroeconomic priorities the analysis establishes three key findings first the results suggest that economic context defined by inflation and unemployment performance has a substantial impact on the public s economic objectives in a way that is broadly consistent with the specification of utility loss functions in the theoretical political economy literature second the results suggest that there is significant cross country variation in inflation aversion controlling for economic context third some of this variation is accounted for by national level factors affecting the aggregate costs of inflation and unemployment these results have significant implications for optimal monetary policymaking the explanation of variation in economic outcomes and for accounts of the choice of institutional frameworks for policymaking i thank the bank of england the center for basic research in the social sciences and the institution for social and policy studies for research support and jim alt andrew bailey bill bernhard lawrence broz john freeman jeff frieden jim granato shigeo hirano david lake jeff lax simon price rose razaghian ron rogowski david stasavage gabriel sterne mike tomz jim vreeland the editor and two anonymous reviewers for helpful comments all views expressed are those of the author and do not represent those of the bank of england

on the asymmetric u shaped relationship between inflation inflation uncertainty and relative price skewness in the uk we investigate the asymmetric relationships between aggregate inflation and the second and third moments of the cross sectional distribution of relative prices using a modified calvo pricing model with regime dependent price rigidities calibration experiments reveal that the inflation standard deviation and inflation skewness relationships exhibit u shaped asymmetries around the historical mean inflation rate uk sectoral data support our results we conclude that monetary policy should target an inflation rate proximate to the common minima of these nonlinear relationships and that core inflation measures should not be used for policy purposes as they exclude much of the information contained in the higher moments

downward wage rigidities and optimal monetary policy in a monetary union this paper analyses the implications of heterogeneity in the type of downward wage rigidity nominal or real for optimal monetary policy in a monetary union with asymmetric wage adjustment costs indexation in one region of the union reduces optimal grease inflation in the presence of common productivity shocks large common shocks may have sizeable and persistent effects on the intra union terms of trade whereby the region characterized by downward real wage rigidity adjusts with a persistent loss of competitiveness in response to asymmetric productivity shocks there is no role for grease inflation because relative price changes facilitating the real wage changes dominate the adjustment mechanism

a comment on the great canadian slump in this comment on fortin 1996 the authors argue that the sluggishness in economic activity in canada in the 1990s is better explained by a combination of factors than by monetary policy alone they find that 1 it is difficult to explain the sluggishness on the basis of the historical relationship between monetary conditions and real activity 2 fortin s evidence of downward nominal wage rigidity is seriously overstated 3 there are several reasons why technological change may have had a larger impact on employment in canada in the 1990s than in the united states and 4 the build up of government debt in the 1980s and 1990s was much more than a cyclical problem associated with monetary policy

poverty and worklessness in britain relative poverty in the uk has risen massively since 1979 mainly because of increasing worklessness rising earnings dispersion and benefits indexed to prices not wages the economic force underlying this is the significant shift in demand against the unskilled this has substantially weakened the low skill labour market which has increased both pay dispersion and worklessness particularly among low skilled men practical policies discussed include improving education and overall well being for children in the lower part of the ability range raising wage floors new deal policies tax credits and benefits for the workless

bottlenecks and the phillips curve a disaggregated keynesian model of inflation output and unemployment benchmark macroeconomic models of output and inflation combine the demand side of the economy with aggregate supply equations based upon some version of the phillips curve in contrast to classical and new classical models such as lucas i972 and sargent 1979 chs i xii and xvi in which prices jump instantaneously to market clearing levels the gradual price adjustment approach represented by tobin 1972 laidler and parkin i975 section 4 barro and grossman 1976 ch 5 sargent 1979 ch ii and ch v i okun i98i and perry i983 take wages and or prices to be predetermined at an instant in time while their rates of change depend on the level of aggregate output in the prototype complete macroeconomic model incorporating this approach output is determined by aggregate demand equations while the augmented phillips curve specifies that prices move in a direction which will tend to return output to its equilibrium value this short run keynesian long run monetarist character is typical of many structural macroeconometric models it is the standard textbook account found for example in dornbusch and fischer i98i and is implicit in much current research there are fundamental questions of consistency in the type of model just described the central difficulty is that with wages and prices predetermined the non market clearing analysis ofbarro and grossman i 976 ch 2 and malinvaud i977 is applicable but in this world the aggregate demand equations are decisive only in the keynesian regime in the other regimes which must arise at high levels of aggregate demand the effective supplies of output or labour or both must be modelled indeed at the aggregate level it is difficult to provide a coherent account of how it is possible to have output above its equilibrium value since this would require labour and output in excess of their notional supplies violating barro and grossman s min condition that quantities be determined by the short side of the market an appealing line for addressing this last difficulty is to disaggregate markets an approach taken by hansen i970 tobin i972 and barro and grossman i976 ch 5 however because each market can be in either excess supply or demand a formal fixed price general equilibrium model appears to be intractable due to the resulting multiplicity of regimes and is not attempted by these authors in this paper these problems are overcome in a disaggregated model in which

united kingdom manpower policy against a background of national economic decline the welsh example chakravarty s p jones d r and mackay r r 1983 united kingdom manpower policy against a background of national economic decline the welsh example reg studies 17 91 104 economic policy has been strongly influenced by a theory which emphasises that only one rate of unemployment is consistent with price stability claims that unemployment is either temporary or voluntary and stresses that lasting reductions in unemployment depend on selective policies designed to encourage adjustments within the labour market this paper outlines experience in wales the evidence is not consistent with the view of unemployment provided by the underlying theory moreover there are considerable problems in applying policies which are designed to reduce the obstacles and frictions to labour market adjustment when unemployment is severe and widespread

colonial legacies and economic growth much of the work on colonialism has been theoretical or anecdotal in this paper i close the gap between the literature on development and new growth theory by testing the effect of colonization on subsequent growth and development in a sample of 63 ex colonial states from 1961 1990 i find that colonies that were held for longer periods of time than other countries tend to perform better on average after independence finally i show that the level of education at the time of independence can help to explain much of the development gap between the former british and french colonies in africa