Money and the Natural Rate of Unemployment

By Finn Ostrup | Go to book overview

1
Introduction

1.1 The aim of the book

It is a common view among economists and policy makers that money has no impact on production in the longer term characterised by full price and wage flexibility and expectations which are formed rationally. This view gained acceptance at the end of the 1960s and the beginning of the 1970s when the concept of an exogenously determined rate of natural unemployment became dominant in economics.

This book aims to present a new view in the discussion of monetary policy and monetary regimes. The book presents a number of new mechanisms, not previously discussed in the literature, which imply that money affects long-term production. This finding of a monetary impact on natural production is important from a policy perspective. The authorities lose the capability of affecting long-term production if they give up the possibility of using monetary policy, for example, by establishing an independent central bank or by joining a monetary union, or if they give up the possibility of choosing a monetary regime.

By a monetary impact on production we understand that either: (i) inflation affects production, inflation being determined through growth in the money supply and thus being controlled by the authorities; or (ii) production is affected by factors which are influenced by the monetary regime, implying that production is changed when there is a shift in the monetary regime. In some of the models which are presented throughout the book, we reach the further conclusion that long-term production can be affected by other instruments controlled through monetary policy, for example sterilised intervention, the central bank's reserve policy, and capital restrictions.

The point of departure of the analysis is essentially classical'. All models throughout the book are based on an economic structure with the following assumptions: (i) all economic relationships result from

-3-

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