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A Reappraisal of the Inflation-Unemployment Tradeoff

  • Karanassou, Marika

    ()

    (Queen Mary, University of London)

  • Sala, Hector

    ()

    (Universitat Autònoma de Barcelona)

  • Snower, Dennis J.

    ()

    (Kiel Institute for the World Economy)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 636.

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Length: 53 pages
Date of creation: Nov 2002
Date of revision:
Publication status: published in: European Journal of Political Economy, 2005, 21 (1), 1-32
Handle: RePEc:iza:izadps:dp636
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