Labor Markets, Unemployment and Optimal Inflation
AbstractThe 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 InfoPaper provided by Department of Economics, University of Victoria in its series Department Discussion Papers with number 1303.
Length: 31 pages
Date of creation: 17 Dec 2013
Date of revision:
Note: ISSN 1914-2838
Contact details of provider:
Postal: PO Box 1700, STN CSC, Victoria, BC, Canada, V8W 2Y2
Web page: http://web.uvic.ca/econ
More information through EDIRC
search-theoretic monetary model; inflation; unemployment; Friedman Rule; search and matching; wage posting; unions; efficiency wage;
Find related papers by JEL classification:
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-29 (All new papers)
- NEP-DGE-2013-12-29 (Dynamic General Equilibrium)
- NEP-MAC-2013-12-29 (Macroeconomics)
- NEP-MON-2013-12-29 (Monetary Economics)
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.:
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