Fatih Özatay, PhD - [Archive]

Unemployment rate and monetary policy 22/01/2011 - Viewed 1487 times

In my last commentary I stated that inflation targeting regime aims to keep inflation rate at the targeted level and unemployment are at a rate considered to be 'normal'. Of course which one of these two aims are prioritized depends on the state of the economy at the questioned period.

If inflation rate does not jump up in periods of crisis, unemployment rate appears to be a higher priority. If the economic history is composed of continuous struggles against inflation rate and it the underlying factor is the ill-designed fiscal policy that has the potential to give way to a number of economic turbulence, you attach priority to inflation targeting so that you can fight with the underlying factors. This was the case for Turkey some decade ago.

In short, the central banks implementing inflation targeting policies do not say that their only concern is the inflation rate, except some extreme cases. They are also interested in the unemployment rate and the level of production in this parallel.

Readers who are interested in these issues but who did not study economics in collage might ask why there is a 'normal' rate of unemployment. Why it is not aimed to reduce unemployment rate down to zero? Instead of explaining why this cannot be done, let me give a brief table.

The table gives the average unemployment rates in selected G-7 countries, developing countries including Turkey and the EU countries in trouble over the periods 1980-2007, 1990-2007 and 2000-2007. I ignored the figures for 2007 as it is a year of crisis (for this period Turkey does not have comparable and consistent data on unemployment with the period before 2005).

Is monetary policy the only problem?
What matters is, even in Japan which has the lowest rates in the table, average unemployment rate over a long period of twenty seven years is 3.3 percent. It is possible to consider this average over such a long period as 'normal' unemployment rate. Therefore, normal rate of unemployment rate stands considerably above zero.

Second, the comparison of the three periods in question reveals that some countries managed to reduce the 'normal' level of unemployment. Particularly Ireland, Spain, United Kingdom and Canada come to the fore with this respect. On the other hand, unemployment rate tended upwards in some other countries. Third, Eurozone countries which implement a single monetary policy have different unemployment rates (the table does not have the data for 2002-2007 period over which the Euro was used as the currency). Fourth, except Japan, the developed countries implement similar monetary policies.

Fifth, United Kingdom and Canada have been implementing inflation targeting regime since early 1990s and have also managed to reduce the unemployment rate. Of course we can also find examples in the opposite direction.

The moral of the story is, there is no point in blaming every trouble on monetary policy.

This commentary was published in Radikal  daily on 22.01.2011