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The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties

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Author Info
Marika Karanassou () (Queen Mary, University of London and IZA)
Hector Sala () (Universitat Autònoma de Barcelona and IZA)
Dennis J. Snower () (Kiel Institute for the World Economy, University of Kiel, CEPR and IZA)

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Abstract

This paper analyses the relation between US inflation and unemployment from the perspective of "frictional growth," a phenomenon arising from the interplay between growth and frictions. In particular, we examine the interaction between money growth (on the one hand) and various real and nominal frictions (on the other). In this context we show that monetary policy has not only persistent, but permanent real effects, giving rise to a long-run inflation-unemployment tradeoff. We evaluate this tradeoff empirically and assess the impact of productivity, money growth, budget deficit, and trade deficit on the US unemployment and inflation trajectories during the nineties.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2900.

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Length: 35 pages
Date of creation: Jul 2007
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Handle: RePEc:iza:izadps:dp2900

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Related research
Keywords: inflation dynamics unemployment dynamics Phillips curve roaring nineties

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  32. Marika Karanassou & Hector Sala & Dennis J. Snower, 2006. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," IZA Discussion Papers 2265, Institute for the Study of Labor (IZA). [Downloadable!]
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  1. Marika Karanassou & Hector Sala & Dennis J. Snower, 2008. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," Discussion Papers 2008-08, School of Economics, The University of New South Wales. [Downloadable!]
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