The optimal policy mix and logic of a social pact

Abstract

From the reasoning of the preceding chapters, one can deduce how an optimal policy mix would look with regard to monetary policy and wage increases. From Chapter 5, we know that in a world of endogenous inside money, nominal wage developments are central for the path of the equilibrium price level. Wage moderation by itself cannot change output or employment. For output to increase, aggregate demand has to be increased, which can be done by cutting interest rates.¹ As wage bargainers thus cannot by themselves increase employment, while the central bank cannot by itself ensure price stability, some kind of cooperation is desirable if the target of both high employment and low and stable inflation is to be achieved.