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Labor Markets, Unemployment and Optimal Inflation

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Abstract

The optimal infation rate and the relationship between inflation and unemployment are central issues in macroeconomics. It is widely accepted that inflation is a monetary phenomenon. However, there is little consensus with regard to unemployment. Economists differ widely in their view of labor markets and wage-setting mechanisms. The present paper develops a search-theoretic monetary model with imperfect labor markets. It studies the issue of the optimal inflation rate and the relationship between inflation and unemployment under four widely used wage-setting mechanisms: search and matching, wage posting, union bargaining, and efficiency wage. It finds that a higher inflation rate reduces output and employment under all wage setting mechanisms. The Friedman rule is not optimal under any wage setting mechanism except wage posting.

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Bibliographic Info

Paper provided by Department of Economics, University of Victoria in its series Department Discussion Papers with number 1303.

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Length: 31 pages
Date of creation: 17 Dec 2013
Date of revision:
Handle: RePEc:vic:vicddp:1303

Note: ISSN 1914-2838
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Keywords: search-theoretic monetary model; inflation; unemployment; Friedman Rule; search and matching; wage posting; unions; efficiency wage;

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References

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  1. Benoit Julien & John Kennes & Ian King, 2000. "Bidding for Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 619-649, October.
  2. Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
  3. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  4. Shi, Shouyong, 1998. "Search for a Monetary Propagation Mechanism," Journal of Economic Theory, Elsevier, vol. 81(2), pages 314-352, August.
  5. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
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Cited by:
  1. Shoujian Zhang, 2014. "Search Frictions, Job Flows and Optimal Monetary Policy," CDMA Working Paper Series 201402, Centre for Dynamic Macroeconomic Analysis.

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