On the Interplay between Keynesian and Supply Side Economics

Marika Karanassou () and Dennis Snower ()

No 206, Economics Series from Institute for Advanced Studies

Abstract: Conventional wisdom suggests that nominal, demand-side shocks have only temporary effects on real macroeconomic magnitudes and that the duration of their effects depends on the degree of nominal inertia. It is also argued that, in the absence of unit roots, temporary supply-side shocks also have only temporary real affects and that the duration of these effects depends on the various sources of real inertia. Our analysis indicates that there is a potentially important interplay between real and nominal inertia in generating the persistent effects of real and nominal shocks. In this sense, then, Keynesian and supply-side economics are mutually interdependent. Our analysis has identified circumstances when real and nominal inertia are complementary in generating real and nominal persistence. Here, we argue, lies a potentially crucial, but as yet largely unexplored, set of determinants of the effectiveness of Keynesian and supply-side economic policies.

Keywords: Unemployment; employment; wage setting; labour force participation; labour market dynamics; unemployment persistence; imperfect unemployment responsiveness (search for similar items in EconPapers)
JEL-codes: J21 J23 J31 J64 J68 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-pke
Date: 2007-04
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