Monetary Policy and European Unemployment

Posted: 1 Jun 2009

See all articles by Ronald Schettkat

Ronald Schettkat

University of Wuppertal - Department of Economics

Rongrong Sun

School of Economics, Henan University

Date Written: Spring 2009

Abstract

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

Suggested Citation

Schettkat, Ronald and Sun, Rongrong, Monetary Policy and European Unemployment (Spring 2009). Oxford Review of Economic Policy, Vol. 25, Issue 1, pp. 94-108, 2009, Available at SSRN: https://ssrn.com/abstract=1408396 or http://dx.doi.org/grp003

Ronald Schettkat (Contact Author)

University of Wuppertal - Department of Economics ( email )

42097 Wuppertal
Germany

Rongrong Sun

School of Economics, Henan University ( email )

Kaifeng
Henan University
Kaifeng, Henan 475001
China

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