Abstract

Exchange Rate Systems and the Phillips Curve

The point of departure of this study is the rise in the inflation and,or unemployment rates in the western industrial countries since the end of the nineteen-sixties, which was also noted in the so-called McCracken report. The more aggressive wage policy of the labour unions since that time has often been highlighted in the scientific debate hitherto as the chief cause of the deterioration of the Phillips relations. The paper seeks an explanation of the change observed worldwide in the unions’ aspirations and of the marked labour cost increases in the seventies as a result of wage agreements for which the the employers were partly responsible The erosion of the world monetary system with basically fixed exchange rates, which persisted from the late sixties onwards and culminated in 1973 in a system of basically flexible exchanges rates, is discussed as a possible factor of worldwide impact which influenced the observed change in wage policy. It is shown that the benefit of a stability-oriented wage policy - for the unions with respect to securing full employment and for the employers with respect to improvement of the international competitiveness of theirs firms - must be assigned less weight in the calculations of labour and management where exchange rates are flexible than under a system of fixed exchanged rates. Moreover,, it is to be expected that the Phillips-curve trade-off in small countries with a large proportion of foreign trade will be less marked under relatively firm exchange rates than under a regime of flexible exchange rates, because in the former case greater wage and price stability as compared to foreign countries leads above all to additional demand, i.e. to more employment and growth, in the sphere of foreign trade, while in the latter case it induces primarily exchange rate movements which tend to offset international differences in stability. These arguments are based on the empirical proof of a marked Phillips relation for the economy of the Federal Republic of Germany in the seventies - under the influence of flexible exchanges rates - while no trade-off between inflation and unemployment rates can be demonstrated for the preceding period