The Role of Demand Management in the Maintenance of Full Employment

31 Pages Posted: 16 Jul 2004

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Date Written: February 1988

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

McCallum, Bennett T., The Role of Demand Management in the Maintenance of Full Employment (February 1988). NBER Working Paper No. w2520, Available at SSRN: https://ssrn.com/abstract=425553

Bennett T. McCallum (Contact Author)

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