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Brainstorming Is a Family Affair

MONETARY POLICY: In the 1970s, Nobel winner Robert Lucas argued that anticipated changes in monetary policy should not affect unemployment because they are already discounted. But Yellen's and Akerlof's 1985 paper, a cornerstone of modern economics, showed that policy can be effective as long as prices and wages are somewhat sticky.

UNEMPLOYMENT: In a free market, wages should adjust to eliminate unemployment. Yellen and Akerlof argued in 1990 that fairness considerations can prevent companies from cutting wages enough to employ all workers.

ADVERSE SELECTION: Akerlof originated the modern theory of how markets fail when buyers and sellers do not have the same information. For example, people who know they are ill tend to take out more medical and life insurance, raising the rates higher than they should be.

ZERO INFLATION: Last year, Akerlof, with William Dickens and George Perry of the Brookings Institution, argued that cutting inflation to zero can actually raise unemployment. They suggest that a low but moderate inflation rate brings the best results in terms of output and employment.



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Updated June 15, 1997 by bwwebmaster
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