Prospects for Output and Employment Growth with Steady Inflation

Monetary policy affects both real variables, such as employment, unemployment and output, and nominal variables, such as nominal interest and inflation rates. For close to a decade, the principal focus of monetary policy has been on inflation. During a recession, or when one appears imminent, the state of real variables such as GDP growth has been a paramount consideration, but at other times, inflation control has been the major objective. We argue that this concentration on inflation has not been misplaced, indeed we suggest that it should be more detailed than it has been. Nevertheless, we see a critical role for monetary policy in reducing unemployment that has not been explicit in some standard approaches to inflation. While we spend a considerable time looking at inflation issues, the objective in doing so is to substantiate the point that adequate management of inflation will leave more scope for real growth and hence for lowering unemployment.