Theoretical and empirical descriptions of the Beveridge curve are critiqued. The lack of empirical evidence for a matching function is discussed together with a simple example of how the aggregate unemployment rate is determined by underlying labor-market flows. The relation of output growth to changes in the unemployment rate (Okun’s law) is estimated at the aggregate level and for various demographic groups, and the practical usefulness of Okun’s law is examined. The role that estimates of the natural rate of unemployment should play in the policy process and the usefulness of the natural rate concept are also examined.

This chapter deals with long-run equilibrium analysis. We first introduce a classical AD-AS model to analyze how the total output is determined in equilibrium under classical assumptions. Next, to analyze frictional unemployment, we discuss a model of the natural rate of unemployment. Then we introduce a representative-firm model to analyze real factor prices and income distribution. Then we introduce a classical model of real interest rate and discuss how the model may be employed to explain economic phenomena and conduct virtual experiments. Next, we introduce the quantity theory of money. We provide a case study of China’s hyperinflation in the 1940s. Finally, we introduce open-economy models to analyze the long-run equilibrium of exchange rates.

The dominant paradigm for analysis of macroeconomic fluctuations takes full-employment equilibrium as the norm and attributes temporary and self-correcting deviations from this norm to exogenous shocks. Notions of the natural rate of unemployment and rational expectations for inflation rest on an equilibrium premise, as do contemporary dynamic stochastic general equilibrium (DSGE) models. There is, however, another way of thinking about business cycles to be found in the historical literature. This alternative paradigm takes the movement of an economy through business cycles as itself the norm and views endogenous forces as driving the process. At the heart of the dynamic is credit behavior in a story that goes back to Bagehot (1874) and found renewal with Minsky (1986). In the boom phase of the cycle, credit expands, business is good, risk is rewarded, and asset values are bid up. But the process overshoots, and collapse ensues, to be followed by a cleansing of excess as businesses fail and the financial system retrenches. Bagehot himself proposed a synthesis of the two paradigms, and this approach works well to interpret the ups and downs of the Philippine economy historically.

Economic policy refers to the actions of the state in defining its objectives and using appropriate instruments to achieve them. The objectives of government in this regard are high long-run economic growth, equitable distribution of income and wealth, and stable prices and output. Macroeconomic policies, represented by monetary and fiscal policies, are just those intended to stabilise prices and output. This chapter begins by examining historically how these policy objectives have been addressed by the Korean government, and, against this backdrop, looks at the goals of macroeconomic policy, and especially monetary policy in Korea.