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The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties

  • Marika Karanassou
  • Hector Sala
  • Dennis J. Snower

This paper argues that there is a nonzero inflation-unemployment tradeoff in the long-run due to frictional growth, a phenomenon that encapsulates the interplay of nominal staggering and money growth. The existence of a downward-sloping long-run Phillips curve suggests the development of a holistic framework that can jointly explain the evolution of inflation and unemployment. Hence, we estimate an interactive dynamics model for the US that includes wage-price setting and labour market equations. We then evaluate the inflation-unemployment tradeoff and assess the impact of productivity, money growth, budget deficit, and trade deficit on the unemployment and inflation trajectories during the nineties.

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File URL: https://www.ifw-members.ifw-kiel.de/publications/the-evolution-of-inflation-and-unemployment-explaining-the-roaring-nineties/KWP%201350%20%28revised%29.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1350.

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Length: 34 pages
Date of creation: Jun 2007
Handle: RePEc:kie:kieliw:1350
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