Une théorie des années quatre-vingt

Seen through the lenses of traditional macroeconomic analyses, the 1980s are highly puzzling. It is especially difficult to understand the persistence of high unemployment in Europe and the de-synchronisation of business cycles in the US and in Europe during the first half of the decade. New «facts» have occurred, which currently available models are not able adequately to explain. This paper offers an alternative analysis of business developments during the 1980s, building on a reconstructed theory of the open economy. Changes in real interest rates and real exchange rates play a major role in this reappraisal: they affect supply decisions and mark-up behaviour of firms operating in an imperfectly competitive environment. Intuitively, we contend that trade relations between the European and American economies are actually too tenuous to generate the traditionally assumed synchronisation of business cycles, and instead are dominated by interactions through financial markets. During the first half of the 80"s, both rising real interest rates and the real appreciation of the dollar induced European firms to raise their mark-ups and to attempt to contain production costs, especially labour costs. But what then happens to mark-ups is just as crucial as what happens to wages: an «exogenous» hike in either breeds «stagflation», insofar as it worsens the terms of the inflation unemployment tradeoff. It may thus be that macroeconomic disturbances — in particular the US «policy mix» — are transmitted negatively. The consequences of such adverse effects were aggravated by the resulting worsening in the fiscal and monetary policy environment, European governments then being impelled to go for pro-cyclical policies. Moreover, the persistent rise in real interest rates had major hysteresis effects that explain the protracted character of the European slump. Such effects also slowed down the recovery, at a time when a depreciating dollar and — moderately — declining real interest rates were favouring a renewal of economic activity in Europe. Slow adjustment to a regime of high real interest rates, together with pro-cyclical policies in Europe as a result of such a regime, explain both the strong persistence of the slump and the slowness of the recovery. As early as 1987, this new theory had led us to forecast a recovery in Europe. Today, the same reasoning induces us to predict that it may well last, even in the event of a recession in the US, but provided interest rates do not to rise further.