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Re-examining Monetary and Fiscal Policy for the 21st Century

Philip Arestis and Malcolm Sawyer

This book provides a much-needed re-examination of monetary and fiscal policies, their application in the real world and their potential for macroeconomic policy in the 21st century. It provides a detailed discussion and critique of the ‘new consensus' in macroeconomics along with the monetary and fiscal policies encapsulated within it.
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Chapter 6: The Inflationary Process

Philip Arestis and Malcolm Sawyer


The general implication of this is that inflationary problems arise when demand runs ahead of capacity, even when there is unemployment of labour, for there may simply be inadequate capacity to support the full employment of labour (or the capacity may be distributed across regions in a way which does not match the distribution of potential workers). When enterprises operate with high levels of capacity, they are faced with rising unit costs: prices rise relative to wages in these circumstances, and hence real wages fall, but money wages cannot catch up with prices to restore the initial real wage. Consequently, in this approach, inflation rises when the level and composition of demand increase past the point where production can increase at around constant costs, and into the range where unit costs are rising (and bottlenecks appearing). Measures such as ‘reform of the labour market’, are then irrelevant for the level of unemployment and of inflation. It is rather the level, composition and distribution of the capital stock which is relevant for unemployment and inflation. The second, and related, set of inflationary pressures comes from the inherent conflict over the distribution of income. The ability of the economy to reconcile the conflict depends, inter alia, on the productive capacity of the economy (the ‘size of the cake’). The determination of the level of economic activity which corresponds to constant inflation, what we term the ‘inflation barrier’ (also in the literature on the...

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