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The Economic Dynamics of Inflation and Unemployment

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  • Todorova, Tamara

Abstract

We study the time path of inflation and unemployment using the Blanchard treatment of the relationship between the two and taking the monetary policy condition into account. We solve the model both in continuous and discrete time and compare the results. The economic dynamics of inflation and unemployment shows that they fluctuate around their intertemporal equilibria, inflation around the growth rate of nominal money supply, respectively, and unemployment around the natural rate of unemployment. However, while the continuous-time case shows uniform and smooth fluctuation for both economic variables, in discrete time their time path is explosive and nonoscillatory. The hysteresis case shows dynamic stability and convergence for inflation and unemployment to their intertemporal equilibria both in discrete and continuous time. When inflation affects unemployment adversely the time paths of the two, both in discrete and continuous time, are dynamically unstable.

Suggested Citation

  • Todorova, Tamara, 2012. "The Economic Dynamics of Inflation and Unemployment," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 2(2), pages 133-140.
    • Handle: RePEc:zbw:espost:148369
    DOI: 10.4236/tel.2012.22025
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    References listed on IDEAS

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    1. Todorova, Tamara, 2010. "Problems Book to Accompany Mathematics for Economists," MPRA Paper 117866, University Library of Munich, Germany.
    2. A. W. Phillips, 1958. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, London School of Economics and Political Science, vol. 25(100), pages 283-299, November.
    3. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76(4), pages 678-678.
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    More about this item

    Keywords

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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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