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.
Download InfoIf 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.
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.:
- Moen, E.R., 1995.
"Competitive Search Equilibrium,"
37/1995, Oslo University, Department of Economics.
- Shi, Shouyong, 1998.
"Search for a Monetary Propagation Mechanism,"
Journal of Economic Theory,
Elsevier, vol. 81(2), pages 314-352, August.
- Julien, B. & Kennes, J. & King, I., 1998.
"Bidding for Labour,"
dp98-03, Department of Economics, Simon Fraser University.
- 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.
- Shouyong Shi, 1995.
"Money and Prices: A Model of Search and Bargaining,"
916, Queen's University, Department of Economics.
- Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
- Shoujian Zhang, 2014. "Search Frictions, Job Flows and Optimal Monetary Policy," CDMA Working Paper Series 201402, Centre for Dynamic Macroeconomic Analysis.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lori Cretney).
If references are entirely missing, you can add them using this form.