Abstract

The Influence of Monetary and Fiscal Policy on the Trade-off between Price Level Stability and Underemployment

Since substantial rises in the price level already occur in underemployment situations with what is deemed to be socially intolerable unemployment, a persistent high degree of employment with minimal unemployment must be regarded as a datum for combatting inflation. Under these conditions, the greater the success in moderating the trade-off between price level stability and underemployment by purposive influencing of the determinants of the trade-off, the more rapidly will inflation policy bring satisfactory results. The traditional strategy of combatting inflation by overall control of demand with the aid of monetary and fiscal policy can make only a very modest contribution to this for a number of important reasons. The exertion of a certain amount of influence on inflation expectations as determinants of the trade-off is most likely to prove possible. While the anti-inflationary employment of monetary policy is restricted to control of the development of macroeconomic demand, with the aid of fiscal policy it is possible to pursue two other important anti-inflationary strategies: 1. Modification of the structural conditions on the goods and labour markets (fiscal structural policy), 2. Purposive influencing of the monopolistic wage and price policy of the labour unions and firms by regulating wages and profits by way of taxation (income taxation policy). Fiscal policy measures oriented to structural policy may be aimed above all at increasing the mobility of labour, intensifying competition and ameliorating differences in sectoral advances in the productivity of labour. This last aspect has hardly been discussed hitherto. Similarly, the orientation of taxation policy to income policy has been largely neglected up to the present. In the more recent literature, Wallich and Weinstein have developed an interesting proposal in this respect. Ihe various points of application for structural and income policy, in addition to the strategy of overall control of demand, should be paid greater attention in practical inflation policy, for they make possible a particularly purposive exertion of influence on important inflationary factors and thereby enhance the effectiveness of inflation policy.