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The Role of Demand Management in the Maintenance of Full Employment

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  • Bennett T. McCallum

Abstract

This paper begins by identifying nominal price stickiness as the logical basis for the Keynesian or activist point of view concerning demand management policy. It then characterizes two alternative approaches to policy analysis that have been adopted by adherents of the Keynesian position, the "disequilibrium" and "Phillips curve" approaches, The former is inherently defective, it is argued, while the latter has yet to be satisfactorily implemented. Indeed, implementation that is not open to Lucas-critique weaknesses is not in sight. In response to the implied dilemma for policy makers, the paper describes a rule for the conduct of monetary policy that relies upon minimal understanding of price-adjustment dynamics and which should be robust to regulatory and technological change In the economy's financial and payments institutions. A bit of evidence is presented to suggest that the rule would, if adopted, lead to approximately zero inflation (on average) and to output/employment fluctuations that are small by historical standards.. Possible criticisms relating to recent European experience and to recent theoretical developments are considered.

Suggested Citation

  • Bennett T. McCallum, 1988. "The Role of Demand Management in the Maintenance of Full Employment," NBER Working Papers 2520, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2520
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    References listed on IDEAS

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    1. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
    2. McCallum, Bennett T, 1986. "On "Real' and "Sticky-Price' Theories of the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 397-414, November.
    3. Blanchard, Olivier Jean, 1990. "Why does money affect output? A survey," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 15, pages 779-835, Elsevier.
    4. McCallum, Bennett T., 1990. "Inflation: Theory and evidence," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 18, pages 963-1012, Elsevier.
    5. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90, National Bureau of Economic Research, Inc.
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    10. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
    11. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
    12. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
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    19. repec:bla:econom:v:50:y:1983:i:200:p:395-405 is not listed on IDEAS
    20. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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    Cited by:

    1. Jeffrey A. Frankel, 1988. "International nominal targeting: a proposal for policy coordination," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 32, pages 234-239.
    2. Issing, Otmar, 2013. "A new paradigm for monetary policy?," CFS Working Paper Series 2013/02, Center for Financial Studies (CFS).

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