A Doubtful Post Keynesian Unemployment Model

Abstract

A decade ago, Milton Friedman posed an unresolved puzzle-how are changes in nominal output, PQ, split between changes in the price level, P, and changes in real output, Q? Disagreeing with the monetarist solution to this puzzle, Sidney Weintraub has argued that the money wage moves P, while the money supply drives real variables such as Q. Diane Zannoni and Edward McKenna (ZM, 1981) set out to provide evidence on the latter hypothesis. Specifically, they ask if the rest of the economy could maintain a stable unemployment rate regardless of Fed (p. 480). Their potential contribution is surely not that monetary policy has short-run real effects; agreement on that would suffice to make Weintraub a monetarist and Friedman a post Keynesian! Rather ZM's novel objective is to seek empirical support for a distinctively post Keynesian view of the transmission mechanism of monetary policy: in the face of an autonomous money wage increase, incomplete monetary accommodation creates excess demand for working capital, drives up interest rates, and forces cutbacks in employment at the new wage rate, despite sufficient aggregate demand. This connection between financial markets and the labor market has been overlooked by monetarists and mainstream Keynesians alike. Unfortunately, problematic points in the specification of ZM's model and in its empirical implementation raise serious