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Inflation and Unemployment in the Long Run

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  • Aleksander Berentsen
  • Guido Menzio
  • Randall Wright

Abstract

We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first discuss data, documenting a strong positive relation between the variables at low frequencies. We then develop a framework where both money and unemployment are modeled using explicit microfoundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets. We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior. The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment. For conservative parameterizations, money accounts for some but not that much of trend unemployment -- by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone. For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13924.

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Date of creation: Apr 2008
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Handle: RePEc:nbr:nberwo:13924

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  1. Phillips Curves and Fisher Relations
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-12-15 21:00:00
  2. Optimal Monetary and Fiscal Policies In a Search-theoretic Model of Money and Unemployment
    by Christian Zimmermann in NEP-DGE blog on 2010-11-20 21:05:53
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