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Cambridge Journal of Economics 24:643-670 (2000)
Copyright © 2000 Cambridge Political Economy Society

Article

Inflation and employment: is there a third way?

F Wilkinson

Department of Applied Economics, Sidgwick Avenue, Cambridge, CB3 9EA, UK
E-mail: sfw@econ.cam.ac.uk

Abstract

High post-war inflation precipitated a counter reformation in theory from Keynesianism and established the conventional wisdom that a level of unemployment existed at which prices stabilised. The policy application of this notion failed to improve economic performance and, although inflation fell, mass unemployment and poverty returned. The explanation for this from within the new orthodoxy was that demand and supply conditions in the labour market had changed and unemployability explained joblessness. A study of the trend in import prices suggests, however, that the fall in inflation can be more readily explained by falls in import prices and other changes, which redistributed resources from the periphery to the core. This suggests that monetary control works indirectly on inflation by lowering economic activity and by reducing the bargaining power of the relatively weak. The enormous economic and social costs of this suggest that institutional ways of controlling prices offer major benefits.

Key Words: NAIRU • distribution • import prices • incomes policies


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