Download American Economic Policy in the 1990s by Jeffrey A. Frankel, Peter R. Orszag PDF

By Jeffrey A. Frankel, Peter R. Orszag

An exam of U.S. financial coverage within the Nineties, by way of top coverage makers in addition to educational economists.

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Sometimes an increase in supply or decrease in demand leads to a fall in the equilibrium real wage for a group of workers. If nominal wages can’t be cut, then the only way to cut real wages is to allow inflation to do the job. Without inflation, the real wage will be stuck above the equilibrium level, resulting in higher unemployment. For this reason, some economists argue that inflation ‘‘greases the wheels’’ of labor markets. Only a little inflation is needed: An inflation rate of 2 percent lets real wages fall by 2 percent per year, or 20 percent per decade, without cuts in nominal wages.

Third, the desire to integrate various points of view shows a lack of dogma and nimbleness of mind. Without doubt, these traits have served Greenspan well in his role as Fed chairman. They have made it easier to get along with both Republican and Democratic administrations and to forge a consensus among open-market committee members with their differing theoretical perspectives. They have also made it easier for him to respond to economic circumstances that are changing, unpredictable, and sometimes inexplicable even after the fact.

By this measure, inflation was lowest in the 1960s and 1990s. But there is an important difference between these two periods. In the 1960s, the highest inflation rate occurred at the end of the decade, representing the beginning of a problem that would persist into the 1970s. By contrast, in the 1990s, inflation peaked at the beginning of the decade and thereafter became tame. 32 percent. 2 Judging the Inflation Experience These comparisons of inflation over the past five decades bring up a classic question of economic theory: What costs does inflation impose on a society?

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