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The shameful rate of unemployment in the EMS: Causes and cures

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Unemployment in the E.C. is tragically high compared with the average rate of 2–3% in the 1960s. Up to the early 1980s the rise may be justified by the need to end the inflationary spiral ignited by the two oil crisis. Thereafter, it is an unintended consequence of the fixed exchanges embraced in the march toward Maastricht. It forced a common interest rate level — in practice the exorbitant rates inposed by Germany since the mid-1980s. The suggested short-run remedy for the EMS, excluding Germany, is to cut rates sharply, maintaining fixed parities among themselves but letting the Mark float. In the longer run and until the day, if ever, that Maastricht is realized, one needs to ensure flexibility of the real exchange rate. With fixed nominal rates, this requires greater coordination of policies, especially wage policies.

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Eighth Tinbergen Lecture delivered on October 7, 1994 at De Nederlandsche Bank, Amsterdam for the Royal Netherlands Economic Association.

I would like to acknowledge the devoted assistance of Rafic Naja, a third year graduate student at MIT. He helped in the design of the paper, carried out the computations for Table 2, and executed Figures 2 and 3. I also wish to thank my colleagues Olivier Blanchard and Paul Samuelson and Dr Stefan Collignon for reading the manuscript and offering valuable criticism.

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Modigliani, F. The shameful rate of unemployment in the EMS: Causes and cures. De Economist 144, 363–396 (1996). https://doi.org/10.1007/BF01682833

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Key words

  • Keynesian unemployment
  • inflationary spiral
  • fixed exchanges
  • Maastricht, interest rate level
  • oil crisis
  • Beveridge curve
  • floating exchange
  • wage policy
  • policy coordination
  • E.C.