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Inflation and Unemployment in General Equilibrium

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  • Rocheteau, Guillaume
  • Rupert, Peter
  • Wright, Randall

Abstract

When labor is indivisible, there exist efficient outcomes with some agents randomly unemployed (Rogerson 1988). We integrate this idea into the modern theory of monetary exchange, where some trade occurs in centralized markets and some in decentralized markets (as in Lagos and Wright 2006). This delivers a general equilibrium model of unemployment and money, with explicit microeconomic foundations. We show the implied relation between inflation and unemployment can be positive or negative, depending on simple preference conditions. Our Phillips Curve provides a long-run, exploitable, trade off for monetary policy; it turns out, however, that the optimal policy is the Freidman rule.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt2fq1855f.

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Date of creation: 01 Aug 2007
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Handle: RePEc:cdl:ucsbec:qt2fq1855f

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Keywords: inflation; unemployment; Phillips Curve;

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References

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  1. Aiyagari, S Rao & Wallace, Neil, 1991. "Existence of Steady States with Positive Consumption in the Kiyotaki-Wright Model," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(5), pages 901-16, October.
  2. Green, Edward J. & Zhou, Ruilin, 1998. "A Rudimentary Random-Matching Model with Divisible Money and Prices," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(2), pages 252-271, August.
  3. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(2), pages 232-251, August.
  4. Guillaume Rocheteau & Peter Rupert & Karl Shell & Randall Wright, 2005. "General equilibrium with nonconvexities, sunspots, and money," Working Paper, Federal Reserve Bank of Cleveland 0513, Federal Reserve Bank of Cleveland.
  5. Aruoba, S. Boragan & Waller, Christopher J. & Wright, Randall, 2011. "Money and capital," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(2), pages 98-116, March.
  6. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers, UCLA Department of Economics 496, UCLA Department of Economics.
  7. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 927-54, August.
  8. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, Econometric Society, vol. 65(1), pages 75-102, January.
  9. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  10. Rod Garratt & Todd Keister & Karl Shell, 2004. "Comparing Sunspot Equilibrium And Lottery Equilibrium Allocations: The Finite Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 351-386, 05.
  11. Ruilin Zhou, 1996. "Individual and aggregate real balances in a random matching model," Staff Report, Federal Reserve Bank of Minneapolis 222, Federal Reserve Bank of Minneapolis.
  12. Zhu, Tao, 2003. "Existence of a monetary steady state in a matching model: indivisible money," Journal of Economic Theory, Elsevier, Elsevier, vol. 112(2), pages 307-324, October.
  13. Aleksander Berentsen & Guido Menzio & Randall Wright, 2009. "Inflation and unemployment in the long run," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 442, Institute for Empirical Research in Economics - University of Zurich.
  14. Edward C. Prescott & Johanna Wallenius, 2012. "Aggregate labor supply," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Oct.
  15. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper, Federal Reserve Bank of Cleveland 0211, Federal Reserve Bank of Cleveland.
  16. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum, Oslo University, Department of Economics 37/1995, Oslo University, Department of Economics.
  17. Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers, Queen's University, Department of Economics 916, Queen's University, Department of Economics.
  18. Aliprantis, C.D. & Camera, Gabriele & Puzzello, D., 2005. "Anonymous Markets and Monetary Trading," Purdue University Economics Working Papers, Purdue University, Department of Economics 1179, Purdue University, Department of Economics.
  19. Aleksander Berentsen & Guillaume Rocheteau, 2003. "Money and the Gains from Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 263-297, February.
  20. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, Elsevier, vol. 7(2), pages 188-209, February.
  21. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
  22. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  23. Dean Corbae & Ted Temzelides & Randall Wright, 2003. "Directed Matching and Monetary Exchange," Econometrica, Econometric Society, Econometric Society, vol. 71(3), pages 731-756, 05.
  24. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 8(3), pages 387-393.
  25. Camera, Gabriele & Corbae, Dean, 1999. "Money and Price Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 985-1008, November.
  26. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
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Cited by:
  1. Stephen D. Williamson & Randall Wright, 2010. "New Monetarist Economics: models," Staff Report, Federal Reserve Bank of Minneapolis 443, Federal Reserve Bank of Minneapolis.
  2. Aruoba, S. Boragan & Waller, Christopher J. & Wright, Randall, 2011. "Money and capital," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(2), pages 98-116, March.
  3. Ed Nosal & Christopher Waller & Randall Wright, 2010. "Introduction to the macroeconomic dynamics: special issues on money, credit, and liquidity," Working Paper Series, Federal Reserve Bank of Chicago WP-2010-14, Federal Reserve Bank of Chicago.

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