Journal of Finance and Economics Volume 6, No. 1 (2017), 22-34 ISSN 2291-4951 E-ISSN 2291-496X Published by Science and Education Centre of North America ~ 22 ~ Unemployment Orthodoxy: Fiscal or Monetary Policy? Case Study of France Nahid Kalbasi Anaraki 1 * 1 School of Business and Technology Management, Northcentral University, USA *Correspondence: Nahid Kalbasi Anaraki, School of Business and Technology Management, Northcentral University, AZ, United States. Email: nkalbasianaraki@ncu.edu Received: May 28, 2017 Accepted: July 5, 2017 Online Published: August 31, 2017 DOI: 10.12735/jfe.v6n1p22 URL: http://dx.doi.org/10.12735/jfe.v6n1p22 Copyright © N. Kalbasi Anaraki ** Abstract France’s economy has suffered from an unprecedented unemployment rate of above 10% over the past decade. The topic is widely debated among economists; while monetary economists argue contractionary monetary policy and austerity plans are the roots of high unemployment rate, New Keynesians believe fiscal policy and high corporate tax rates are the roots of problem. Lucas critique conjectures that monetary policy has only short term effects on real variables including unemployment. This study tests the hypothesis whether fiscal policy plays a more important role than monetary policy in shaping unemployment in France. The paper implements several econometric models to find out which group of policy variables is more effective in combating unemployment. Indeed, the study tests the hypothesis whether New Keynesian models have a better prediction power in explaining unemployment rate than New Classical models. Implementing quarterly data for the period of 1980-2015 and using OLS and GMM techniques the study finds out fiscal policy variables are the most important factors in shaping unemployment rate in France, supporting New Keynesian proposition. JEL Classifications: E24, J23, C20, C50 Keywords: Fiscal policy, monetary policy, new Keynesian model, classical theory of unemployment, wage stickiness, unemployment benefit, Lucas critique 1. Introduction 1.1. Introduction to the Problem The financial recession in 2007 has led to stagnation and persistent unemployment in several European economies. Despite low levels of short term interest rates, many economies in Europe still suffer from ** This is an open access article distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/). Licensee: Science and Education Centre of North America How to cite this paper: Kalbasi Anaraki, N. (2017). Unemployment orthodoxy: Fiscal or monetary policy? Case study of France. Journal of Finance and Economics, 6(1), 22-34. http://dx.doi.org/10.12735/jfe.v6n1p22