Abstract

International Economic and Monetary Problems: Floating, Unemployment and Monetary Policy

Milton Friedman attributes the rapid increase in unemployment since the early nineteen-seventies to the greater role played by monetary policy with a discretionary orientation. Monetary policy, he claims, has become an element of uncertainty and fluctuations of priceincrease rates triggered by monetary policy make it more difficult to distinguish between relative and absolute price changes. Unexpected and rapidly alternating shifts in relative prices, however, result - seen from this standpoint - in a decline in investments, and they push up the unemployment figures. The same occurs when shifts in relative prices between countries are dominated by fluctuations of real exchange rates. Then it is chiefly rate fluctuations on the foreign exchange markets which determine the relative prices of goods and services and the relative returns on assets expressed in terms of various currencies. The market and mostly unpredictable fluctuations of the dollar exchange rates from 1973 onwards encourage trade protectionism; they may influence production and demand decisions in favour of closer orientation to the home country; and they often induce orientation of stabilization measures in economic policy to foreign trade developments instead of domestic economic necessities. Hence the rise in trade-cycle-dependent unemployment in the nineteen-seventies may possible be attributable to the marked and unexpected fluctuations of real exchange rates. On the other hand, decontrol of the dollar exchange rate did not bring autonomy of monetary policy. True, the central banks have gained more leeway in determining the supply of central bank money. But for the Federal Republic of Germany it has proved that since then firms have sought financing in foreign countries to an increasing extent. The expansion of the leeway of the central banks on the supply side is thus offset to an increasing degree by substitution processes on the demand side.