Abstract

Exchange Rate System and Philipps Curve: Reply and Comment

The author takes issue with the critical objections to his essay in No. 1/1982. He draws attention to the high macroeconomic costs of unemployment which have had to be paid in recent years by countries under the influence of monetaristic policy and which exceeded even the expectations of monetarists. He sees a weakness of the Philipps curve function of the monetarist type that is given preference by M. J. M. Neumann in the fact that, in contrast to the simple Philipps curve approach of the Keynesian type, it contains variables whose trends are not, or only with great difficulty, susceptible of empirical determination: the “natural unemployment rate” and the “price change expectation variable”. In particular, he discusses the three questions raised by Neumann’s reply: 1. When dida structural break occur on the labour market of the Federal Republic of Germany? 2. At what numerical value of b is the biggest trade-off between inflation and unemployment obtained? 3. How can long-term and short-term Philipps curves be identified? The author then discusses the article by P. Lang and R. Ohr: 1. the lag between import price increases and their actual impact on the domestic inflation rate; 2. the question of why 1970 was chosen as the beginning of the period of flexible exchange rates; 3. the objection to smaller degrees of freedom. In conclusion, he deals critically with the alternative estimates of Philipps curves proposed by Lang and Ohr.