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A Reappraisal of the Inflation-Unemployment Tradeoff

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  • Karanassou, Marika

    (Queen Mary, University of London)

  • Sala, Hector

    (Universitat Autònoma de Barcelona)

  • Snower, Dennis J.

    (Hertie School of Governance)

Abstract

This paper offers a reappraisal of the inflation-unemployment tradeoff, based on "frictional growth" describing the interplay between nominal frictions and money growth. When the money supply grows in the presence of price inertia (due to staggered wage contracts with time discounting), the price adjustments to each successive change in the money supply are never able to work themselves out fully. In this context, monetary shocks have a gradual and delayed effect on inflation, and these shocks also generate plausible impulse-responses for unemployment. Although our theory contains no money illusion, no permanent nominal rigidities, and no departure from rational expectations, there is a long-run inflation-unemployment tradeoff.

Suggested Citation

  • Karanassou, Marika & Sala, Hector & Snower, Dennis J., 2002. "A Reappraisal of the Inflation-Unemployment Tradeoff," IZA Discussion Papers 636, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp636
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    More about this item

    Keywords

    inflation; unemployment; Phillips curve; nominal inertia; wage-price staggering; monetary policy; business cycles; forward-looking expectations;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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