How does monetary policy affect unemployment?


Unemployment rate is given a great importance by the official representatives and the workers because it has a profound effect on the economy of a country. Politicians pledge that they will introduce such economic policies that will raise the job opportunities. At the time of recession in an economy, the government representatives have to face a huge pressure from the side of citizens to resolve the issue of unemployment. It happens sometimes that this pressure is being diverted to the central banks so that they could lower down the unemployment rate by adjusting the monetary policy. This policy is capable to influence the labor market however its effects are considered indirect. It means that it does not affect the labor market directly.

What is Monetary Policy?

This policy is capable to influence the supply of national income and it also affects the availability of cash and credit for the consumers and the business. Central banks are responsible to look after the monetary policies of their concerned countries. Central banks try to exercise those monetary policies that pave the way for the economic growth and establish a constant price system in which inflation remains under control. The policy makers of central banks prefer those strategies too that regulate the interest rates and money supply.

What are the Theories/ Speculation?

An economist of New Zealand had published a paper in 1958 in which he tried to consider the relationship between the inflation and unemployment. He observed that when the rate of unemployment in an economy was low, at that time inflation was very high or vice versa. This negative correlation was presented by A.W. Phillips so it is known as Phillips Curve. Harvard economist whose name is Gregory Mankiw says that the swap between the unemployment rate and inflation is impermanent but it can remain for many years. This is the burning point due to which we often find the policy makers and the economists to argue on the issue that to what extend a government must use the monetary policy to influence the rate of unemployment.

What are the key Effects?

It is said that the monetary policies made by the Federal Reserves have a direct influence on the credit and the supply of money but it has an indirect influence on labor market. The restrictive monetary policies influence the economic growth and these policies foster the firms to fire their works so as a result the unemployment rate gets higher. The Dallas Federal Reserve reports that if you can control the inflation, you can achieve the goal of stable economic growth. And this growth will ultimately result in the low rate of unemployment.

What is Prevention?

A previous Governor who belongs to Reserve Bank of New Zealand says that the greatest contribution of monetary policies toward unemployment rate is sustaining a constant price system. He says that when the monetary policies are being utilized as a tool for having the economic growth and high rate of employment then these policies result in high inflation in long rum ultimately.


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