Advanced Search
MyIDEAS: Login to save this paper or follow this series

Inflation and Unemployment in the Long Run

Contents:

Author Info

  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w13924.pdf
Download Restriction: no

Bibliographic Info

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

as in new window
Length:
Date of creation: Apr 2008
Date of revision:
Publication status: published as Aleksander Berentsen & Guido Menzio & Randall Wright, 2011. "Inflation and Unemployment in the Long Run," American Economic Review, American Economic Association, vol. 101(1), pages 371-98, February.
Handle: RePEc:nbr:nberwo:13924

Note: EFG LS ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lei Fang & Richard Rogerson, 2009. "Policy Analysis In A Matching Model With Intensive And Extensive Margins," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1153-1168, November.
  2. Farmer, Roger E A, 2000. "Natural Rate Doubts," CEPR Discussion Papers 2426, C.E.P.R. Discussion Papers.
  3. Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers 473, Society for Economic Dynamics.
  4. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  5. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2008. "Information, Liquidity and Asset Prices," PIER Working Paper Archive 08-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Working Papers tecipa-437, University of Toronto, Department of Economics.
  7. Richard Rogerson & Lodewijk P. Visschers & Randall Wright, 2008. "Labor Market Fluctuations in the Small and in the Large," NBER Working Papers 13872, National Bureau of Economic Research, Inc.
  8. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
  9. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  10. Weimin Wang & Shouyong Shi, 2006. "The Variability of Velocity of Money in a Search Model," Working Papers tecipa-190, University of Toronto, Department of Economics.
  11. Lehmann E., 2006. "A Search Model of Unemployment and Inflation," Working Papers ERMES, ERMES, University Paris 2 0605, ERMES, University Paris 2.
  12. Guido Menzio, 2007. "A Theory of Partially Directed Search," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115(5), pages 748-769, October.
  13. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(5), pages 881-94, October.
  14. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2007. "Money and capital," Working Paper 0714, Federal Reserve Bank of Cleveland.
  15. Chiu, Jonathan & Meh, Césaire A., 2011. "Financial Intermediation, Liquidity, And Inflation," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 15(S1), pages 83-118, April.
  16. Roger E. A. Farmer, 2005. "Shooting the Auctioneer," 2005 Meeting Papers 26, Society for Economic Dynamics.
  17. Stephen Williamson, 2004. "Search, Limited Participation, and Monetary Policy," 2004 Meeting Papers 214, Society for Economic Dynamics.
  18. S. Rao Aiyagari & Neil Wallace, 1991. "Existence of steady states with positive consumption in the Kiyotaki-Wright model," Working Papers 428, Federal Reserve Bank of Minneapolis.
  19. Lucas, Robert E, Jr, 1980. "Two Illustrations of the Quantity Theory of Money," American Economic Review, American Economic Association, vol. 70(5), pages 1005-14, December.
  20. Albrecht, James & Gautier, Pieter & Vroman, Susan, 2003. "Equilibrium Directed Search with Multiple Applications," IZA Discussion Papers 719, Institute for the Study of Labor (IZA).
  21. Dale T. Mortensen, 2005. "More on Unemployment and Vacancy Fluctuations," 2005 Meeting Papers 326, Society for Economic Dynamics.
  22. P. Diamond, 1980. "Mobility Costs, Frictional Unemployment and Efficiency," Working papers 257, Massachusetts Institute of Technology (MIT), Department of Economics.
  23. Blanchard, Olivier J & Galí, Jordi, 2008. "Labour Markets and Monetary Policy: A New Keynesian Model with Unemployment," CEPR Discussion Papers 6765, C.E.P.R. Discussion Papers.
  24. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  25. Lawrence J. Christiano & Terry J. Fitzgerald, 1999. "The Band pass filter," Working Paper 9906, Federal Reserve Bank of Cleveland.
    • Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, 05.
  26. Peter Howitt, 2005. "Beyond Search: Fiat Money In Organized Exchange," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 405-429, 05.
  27. Cooley, Thomas F. & Quadrini, Vincenzo, 2004. "Optimal monetary policy in a Phillips-curve world," Journal of Economic Theory, Elsevier, vol. 118(2), pages 174-208, October.
  28. Mark Gertler & Antonella Trigari, 2006. "Unemployment fluctuations with staggered Nash wage bargaining," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  29. Dave Andolfatto & Scott Hendry & Kevin Moran, 2004. "Labour markets, liquidity, and monetary policy regimes," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 392-420, May.
  30. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers, Queen's University, Department of Economics 930, Queen's University, Department of Economics.
  31. Acemoglu, Daron & Shimer, Robert, 1999. "Holdups and Efficiency with Search Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 827-49, November.
  32. Dean Corbae & Ted Temzelides & Randall Wright, 2003. "Directed Matching and Monetary Exchange," Econometrica, Econometric Society, Econometric Society, vol. 71(3), pages 731-756, 05.
  33. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  34. Dale T. Mortensen & Randall Wright, 2002. "Competitive Pricing and Efficiency in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 1-20, February.
  35. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 385-411, April.
  36. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 269-300, November.
  37. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report, Federal Reserve Bank of Minneapolis 346, Federal Reserve Bank of Minneapolis.
  38. Ben Craig & Guillaume Rocheteau, 2006. "Inflation and welfare: a search approach," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Jan.
  39. Wallace, Neil, 2001. "Whither Monetary Economics?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 847-69, November.
  40. Boragan Aruoba, S. & Rocheteau, Guillaume & Waller, Christopher, 2007. "Bargaining and the value of money," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2636-2655, November.
  41. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  42. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2012. "Information, Liquidity, Asset Prices, and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 1209-1238.
  43. Haug, Alfred A. & King, Ian P., 2011. "Empirical evidence on inflation and unemployment in the long run," MPRA Paper 33409, University Library of Munich, Germany.
  44. Faig, Miquel & Huangfu, Xiuhua, 2007. "Competitive-search equilibrium in monetary economies," Journal of Economic Theory, Elsevier, vol. 136(1), pages 709-718, September.
  45. D. Aliprantis, C. & Camera, G. & Puzzello, D., 2007. "Anonymous markets and monetary trading," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(7), pages 1905-1928, October.
  46. Hagedorn, Marcus & Manovskii, Iourii, 2008. "The cyclical behavior of equilibrium unemployment and vacancies revisited," Working Paper Series 0853, European Central Bank.
  47. Wright, Randall, 2010. "A uniqueness proof for monetary steady state," Journal of Economic Theory, Elsevier, vol. 145(1), pages 382-391, January.
  48. Faig, Miquel & Jerez, Belen, 2005. "A theory of commerce," Journal of Economic Theory, Elsevier, vol. 122(1), pages 60-99, May.
  49. Philipp Kircher, 2008. "Efficiency of Simultaneous Search," PIER Working Paper Archive 08-004, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  50. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  51. 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, vol. 47(3), pages 701-722, 08.
  52. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report, Federal Reserve Bank of Minneapolis 218, Federal Reserve Bank of Minneapolis.
  53. Shi, Shouyong, 1999. "Search, inflation and capital accumulation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(1), pages 81-103, August.
  54. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2011. "Information and Liquidity," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43, pages 355-377, October.
  55. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  56. Shi Shouyong, 1997. "Search for a Monetary Propagation Mechanism," Working Papers, Queen's University, Department of Economics 966, Queen's University, Department of Economics.
  57. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-90, September.
  58. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(1), pages 118-41, February.
  59. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  60. Klee, Elizabeth, 2008. "How people pay: Evidence from grocery store data," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 526-541, April.
  61. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  62. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 451-72, June.
  63. 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.
  64. Araujo, Luis, 2004. "Social norms and money," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(2), pages 241-256, March.
  65. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  66. 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.
  67. Yiting Li, 2011. "Currency and Checking Deposits as Means of Payment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 403-417, April.
  68. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle, Second Version," PIER Working Paper Archive 09-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Feb 2009.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. 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
  2. Phillips Curves and Fisher Relations
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-12-15 21:00:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is featured on the following reading lists or Wikipedia pages:
  1. Inflation and Unemployment in the Long Run (AER 2011) in ReplicationWiki

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:13924. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.