Journal Article

Monetary policy and European unemployment

Ronald Schettkat and Rongrong Sun

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 25, issue 1, pages 94-108
Published in print January 2009 | ISSN: 0266-903X
Published online January 2009 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grp003
Monetary policy and European unemployment

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In the long history of rising and persistent unemployment in Europe, almost all welfare-state institutions—employment protection legislation, unions, wages, wage structure, unemployment insurance, etc.—have been alleged to have caused and found guilty of causing this tragic development at some point in time. Later, welfare-state institutions in interaction with external shocks were identified as more plausible causes of rising equilibrium unemployment in Europe. Monetary policy has managed to be regarded as innocent. Based on the assertion of the neutrality of money in the medium and long run, the search for causes of European unemployment has shied away from the policy of central banks. But actually the institutional set-up regarding monetary policy is very different between the Federal Reserve System (Fed) and the Bundesbank and its successor, The European Central Bank (ECB). We argue that the interaction of adverse shocks and tight monetary policies may have been the major—although probably not the only—cause of unemployment in Europe remaining at ever higher levels after each recession. We identify the monetary policy of the Bundesbank as asymmetrical, in the sense that the Bank did not actively fight against recessions, but it dampened recovery periods. Less constraint on growth would have kept German unemployment at lower levels.

Keywords: production; employment; unemployment; monetary policy; central banks and their policies; E23; E24; E42; E43; E52; E58

Journal Article.  6190 words.  Illustrated.

Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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