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Table 8.3 The Puzzle of the 1980s Germany France EMS GDP Long-term GDP Long-term GDP Long-term Deflator interest rates Deflator interest rates Deflator interest rates % % % Change Nominal Real Change Nominal Real ER* Change Nominal Real Year (1) (2) (3) (1) (2) (3) (4) (1) (2) (3) ’61–’70 3.8 6.8 2.9 4.4 6.5 2.0 4.4 6.7 2.2 1982 4.4 9.0 4.4 11.7 15.7 3.6 11.5 14.3 2.5 1983 3.2 7.9 4.6 9.7 13.6 3.6 3.0 8.5 12.6 3.9 1984 2.1 7.8 5.6 7.5 12.5 4.7 3.1 6.9 11.8 5.6 1985 2.1 6.9 4.8 5.8 10.9 4.8 3.0 6.0 10.9 4.6 1986 3.2 5.9 2.6 5.2 8.4 3.0 3.2 5.5 9.2 5.3 1987 1.9 5.8 3.9 3.0 9.4 6.2 3.4 4.1 9.4 5.1 1988 1.5 6.1 4.6 2.8 9.0 6.1 3.4 4.4 9.3 4.7 1989 2.4 7.0 4.5 3.0 8.8 5.6 3.4 4.9 9.8 4.7 * Exchange rate: Francs/Mark. The Shameful Rate of Unemployment in the EMS 259
260 Unemployment and Monetary Policy in the European Union could not tolerate even a modest, non-escalating inflation as slow as 2 percent (and subject to a substantial measurement error) and refused to accommodate it, at the cost of high unemployment. This policy might be justified if the high unemployment had the effect of moderating the cost push inflation resulting from wage demands in excess of productivity. However, the evidence suggests that this costly mechanism is at best highly inefficient; despite the high unemployment, the inflation never descended appreciably below the 2 percent level first reached in 1984. Could there be some mechanism less economically costly and socially destructive to achieve acceptable price stability? This is the issue discussed in the last section of this paper. Table 8.3 providers similar data for France and the other EMS countries. As can be seen from column (3), since 1984 French long-term real interest rates fluctuated between 3.0 and just over 6 percent, a level much higher than in the 1960s, even though the availability of jobs was at the lowest level and unemployment was consistently at the distressing level of around 9 percent. Up to 1986, this policy could be justified by the goal of resisting a rate of inflation which, though steadily decreasing, was still quite high. But by 1987, wage increases in France and in the rest of the community abated substantially, and in 1987, inflation came down in France to a fairly modest level of 3 percent, which was maintained throughout the rest of the 1980s. Yet monetary policy in France was not loosened, but rather became even more restrictive. One possible explanation could be that the Central Bank was resisting that 3 percent as the Bundesbank appeared to resist 2 percent. But a more credible and fundamental explanation is that by then the members of the EMS had decided to move toward a stable exchange rate, with a progressively smaller range of fluctuations around parity, on the way to a unified currency. In the case of France, this policy became operative at least by 1986, as can be seen from column (4) for France, showing that the exchange rate with the Mark (in French Francs per Mark) is rigidly fixed since then (the so-called Franc Fort policy). But the only way to maintain a stable exchange rate when capital is highly mobile, as has been more and more the case in recent years, and the Central Bank has limited reserves, is to pursue a monetary policy resulting in French rates matching (being as attractive to investors as) interest on Mark-denominated instruments. It is this requirement that accounts for the continuing high French rate, even higher than the high German one because of less “credibility.” This obligation of toeing Bundesbank policy had been a positive feature of the EMS during the late 1970s and part of the 1980s for countries that suffered from chronic wage and price inflation, as did many countries at that time. Joining the rigorous monetary and exchange policy of Germany, inspired by and consistent with price stability and high employment, forced countries to accept its strait-
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THE COLLECTED PAPERS OF FRANCO MODI
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Franco Modigliani in 1992.
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© 2005 Massachusetts Institute of
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CONTENTS Preface Francesco Franco I
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PREFACE The essays collected in thi
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xii Introduction decades of the twe
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THE LIFE-CYCLE HYPOTHESIS I
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4 The Life-Cycle Hypothesis them. W
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6 The Life-Cycle Hypothesis which c
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8 The Life-Cycle Hypothesis extent
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10 The Life-Cycle Hypothesis Assump
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12 The Life-Cycle Hypothesis e dy d
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14 The Life-Cycle Hypothesis We wil
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16 The Life-Cycle Hypothesis The fi
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18 The Life-Cycle Hypothesis We fee
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20 The Life-Cycle Hypothesis P = y
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22 The Life-Cycle Hypothesis y y e
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24 The Life-Cycle Hypothesis consum
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26 The Life-Cycle Hypothesis as an
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28 The Life-Cycle Hypothesis It wil
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30 The Life-Cycle Hypothesis is one
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32 The Life-Cycle Hypothesis The re
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34 The Life-Cycle Hypothesis Unfort
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36 The Life-Cycle Hypothesis basis
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38 The Life-Cycle Hypothesis 14. Fo
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40 The Life-Cycle Hypothesis 33. It
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42 The Life-Cycle Hypothesis which
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44 The Life-Cycle Hypothesis assump
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2 THE “LIFE-CYCLE” HYPOTHESIS O
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The “Life-Cycle” Hypothesis of
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(11) I C 0.634 0.080 0.634 0.092 0.
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3 LONG-RUN IMPLICATIONS OF ALTERNAT
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Long-Run Implications of Alternativ
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Table 3.1 A. Effects of Government
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4 RECENT DECLINES IN THE SAVINGS RA
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Table 4.1 (continued) Regression Va
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Recent Declines in the Savings Rate
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Table 4.2 (continued) First Differe
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Table 4.3 Period & estimation Surpl
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Table 4.4 The Role of Major Variabl
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Table 4.5 Estimates for Developing
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Table 4.6 (continued) Savings Growt
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5 THE AGE-SAVING PROFILE AND THE LI
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The Age Saving Profile 143 It is ob
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The Age Saving Profile 145 The exer
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The Age Saving Profile 147 same coh
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The Age Saving Profile 149 therefor
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The Age Saving Profile 151 One poss
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The Age Saving Profile 153 0 50 100
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The Age Saving Profile 155 0 5 10 1
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The Age Saving Profile 157 -10 -5 0
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10 40 45 Median discretionary savin
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The Age Saving Profile 161 effect f
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The Age Saving Profile 163 between
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The Age Saving Profile 165 tion. Si
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The Age Saving Profile 167 to save
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The Age Saving Profile 169 sampling
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The Age Saving Profile 171 10. One
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6 THE CHINESE SAVING PUZZLE AND THE
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Table 6.1 Chinese Household Income
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The Chinese Saving Puzzle 177 the p
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The Chinese Saving Puzzle 179 Even
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The Chinese Saving Puzzle 181 those
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The Chinese Saving Puzzle 183 3.3.2
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The Chinese Saving Puzzle 185 3. S(
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The Chinese Saving Puzzle 187 ddpCY
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Table 6.3 Estimates of Coefficients
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The Chinese Saving Puzzle 191 respe
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The Chinese Saving Puzzle 193 These
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The Chinese Saving Puzzle 195 marke
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The Chinese Saving Puzzle 197 coeff
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The Chinese Saving Puzzle 199 6 Con
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The Chinese Saving Puzzle 201 Accor
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The Chinese Saving Puzzle 203 Appen
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The Chinese Saving Puzzle 205 Horio
Page 224 and 225: 7 AN ECONOMISTS’ MANIFESTO ON UNE
Page 226 and 227: An Economists’ Manifesto on Unemp
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Page 304 and 305: 12 RISK-ADJUSTED PERFORMANCE: HOW T
Page 306 and 307: Risk-Adjusted Performance 291 portf
Page 308 and 309: Risk-Adjusted Performance 293 sugge
Page 310 and 311: Risk-Adjusted Performance 295 Nonet
Page 312 and 313: Risk-Adjusted Performance 297 relat
Page 314 and 315: Risk-Adjusted Performance 299 On th
Page 316 and 317: Risk-Adjusted Performance 301 Nonet
Page 318 and 319: Risk-Adjusted Performance 303 perfo
Page 320 and 321: 13 THE RULES OF THE GAME AND THE DE
Page 322 and 323: The Rules of the Game and the Devel
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The Rules of the Game and the Devel
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14 EMERGING ISSUES IN THE WORLD ECO
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Emerging Issues on the World Econom
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328 Miscellanea mammoth unemploymen
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330 Miscellanea important one at th
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332 Miscellanea M M s M d M d Figur
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334 Miscellanea the flexibility of
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336 Miscellanea Table 15.1 (continu
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338 Miscellanea Table 15.2 Unemploy
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340 Miscellanea Table 15.2 (continu
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342 Miscellanea are equal: one must
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344 Miscellanea For the purpose of
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346 Miscellanea IV.4 The Saving—I
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348 Miscellanea corresponding axis
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350 Miscellanea understood however
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352 Miscellanea creates an excess s
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354 Miscellanea short of totalitari
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356 Miscellanea VI.5 The Role of Fi
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358 Miscellanea flexible nominal wa
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INTERVIEW IV
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364 Interview at Modigliani’s vac
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366 Interview Solow: Now, with Mars
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368 Interview in employment. When t
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370 Interview interest elasticity o
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372 Interview industries such as ag
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374 Interview The theorem, which by
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376 Interview governmental finance
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378 Interview Solow: You had a majo
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380 Interview consequences of “Pe
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382 Interview century, to below 6 p
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INDEX Accelerator effect, 221 Accou
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Index 387 Coefficients of the aggre
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Index 389 Equilibrium market, 328-3
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Index 391 cash, 142, 143 in China,
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Index 393 and open economy, 358 and
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Index 395 Monetary policy argument
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Index 397 Real wages. See Wages, re
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Index 399 Tanzania, income and savi
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Index 401 “Wedge” between pay a
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