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Inflation and Unemployment in General Equilibrium

Listed author(s):
  • Rocheteau, Guillaume
  • Rupert, Peter
  • Wright, Randall

When labor is indivisible, there exist efficient outcomes with some agents randomly unemployed (Rogerson 1988). We integrate this idea into the modern theory of monetary exchange, where some trade occurs in centralized markets and some in decentralized markets (as in Lagos and Wright 2006). This delivers a general equilibrium model of unemployment and money, with explicit microeconomic foundations. We show the implied relation between inflation and unemployment can be positive or negative, depending on simple preference conditions. Our Phillips Curve provides a long-run, exploitable, trade off for monetary policy; it turns out, however, that the optimal policy is the Freidman rule.

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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt2fq1855f.

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Date of creation: 01 Aug 2007
Handle: RePEc:cdl:ucsbec:qt2fq1855f
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  1. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  2. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
  3. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
  4. Aleksander Berentsen & Guillaume Rocheteau, 2003. "Money and the Gains from Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 263-297, February.
  5. Aleksander Berentsen & Guido Menzio & Randall Wright, 2008. "Inflation and Unemployment in the Long Run," PIER Working Paper Archive 08-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
  7. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  8. Dean Corbae & Ted Temzelides & Randall Wright, 2003. "Directed Matching and Monetary Exchange," Econometrica, Econometric Society, vol. 71(3), pages 731-756, 05.
  9. Rod Garratt & Todd Keister & Karl Shell, 2004. "Comparing Sunspot Equilibrium And Lottery Equilibrium Allocations: The Finite Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 351-386, 05.
  10. 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).
  11. Zhu, Tao, 2005. "Existence of a monetary steady state in a matching model: divisible money," Journal of Economic Theory, Elsevier, vol. 123(2), pages 135-160, August.
  12. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
  13. 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.
  14. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2007. "Money and capital," Working Paper 0714, Federal Reserve Bank of Cleveland.
  15. D. Aliprantis, C. & Camera, G. & Puzzello, D., 2007. "Anonymous markets and monetary trading," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1905-1928, October.
  16. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
  17. S. Rao Aiyagari & Neil Wallace, 1991. "Existence of Steady States with Positive Consumption in the Kiyotaki-Wright Model," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 901-916.
  18. Camera, G. & Corbae, D., 1998. "Money and Price Dispersion," Working Papers 98-03, University of Iowa, Department of Economics.
  19. Johanna Wallenius & Edward C. Prescott, 2011. "Aggregate labor supply," Staff Report 457, Federal Reserve Bank of Minneapolis.
  20. Green, Edward J. & Zhou, Ruilin, 1998. "A Rudimentary Random-Matching Model with Divisible Money and Prices," Journal of Economic Theory, Elsevier, vol. 81(2), pages 252-271, August.
  21. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  22. Ruilin Zhou, 1996. "Individual and Aggregate Real Balances in a Random Matching Model," GE, Growth, Math methods 9612001, EconWPA, revised 23 Dec 1996.
  23. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  24. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
  25. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
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