Can monetary or fiscal policy solve cyclical unemployment?

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The monetary policy, as well fiscal policy in practice has lot of limitations in solving cyclical unemployment. The real market economy, particualrly mature market economies do not work like the classical or neo-classical model. The economic agents, such as consumers and firms do not behave like the economic model suggests. That is, in actual practice the cyclical boom and bust can be due to the endogeneous factors as well as exogeneous factors. For example, in one economy monetary policy may be sucessful in controlling inflation but not in other. This is because inflation is not only a monetary phenominon but also can be a combination of monetary and non-monetary phenominon due to the structural, behavioral, institutional as well as how the market actually works. As well, the role of govenment varies from one country to another due to historical and social reasons. In other words, the monetary policy effects can vary form one country to another in controlling inflation itself depending on the causes of inflation ina country. Most economies are not pure market economies they are mixed economies, their fore the market forces alone do not work freely and it may have contradictory processes. This may be the reason for the cyclical unemployment for some countries but not the other because the degree of govenment intervention in the economy varies from one country to another. There fore monetary as well as fiscal polcy has its limitations because their models of how the market economy works is simplistic and it may considerably differ how the market works and come into equilibrium and the processes involved and the time horizon they come into equilibrium.

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Recently, the global financial crisis, created a depp recession. Many countries used fiscal policy as measure to kickstart the economy. The monetary policy did not work due to liquidity trap. That is, monetary policy in its own will not solve high unemployment levels due to recession. At least, in a deep recession fiscal policy seems to work, than monetary policy. As well, the banking sector may not grant loans to business as they may hold the money and there fore the money supply will not increase and there fore even acording to their model the economic activity will be the same. In other words to solve deep recession monetary policy is mostly ineffective. As well, fiscal policy can also cause inflation or excessive inflation and they may create inflation at ahigher level of unemployment in the long-term called stagflation.

In effect, monetary as well as fiscal policy has some effect in solving the cyclical unemployment. However, they may not solve the boom and bust cycle in some circumstances. They may increase the boom and bust cycle. The boom and bust cycle also can be due to random factors and it is unpredictable due to dynamic factors and shocks. it can be said according to empirical evidence monetary and fiscal policy has advantages as well they also have severe disadvantages and they have the tendecy tto solve some cyclical unemployment but not all and they may increase the boom and bust cycle if they are practiced without any factual basis.

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Can monetary or fiscal policy solve cyclical unemployment?, Seekyt
General Contributor
Janice is a writer from Chicago, IL. She created the "simple living as told by me" newsletter with more than 12,000 subscribers about Living Better and is a founder of Seekyt.