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Inflation and Unemployment in the Long Run

  • Randall Wright

    (University of Pennsylvania)

  • Guido Menzio

    (University of Pennsylvania)

  • Aleksander Berentsen

    (University of Basel)

We study the long run (low frequency) dynamic relationship between money, as measured by inflation or interest rates, and unemployment. We first discuss the data. We then develop a framework where money and unemployment are both modeled with microfoundations based on explicit frictions. This integrates and extends recent work in macro-labor economics and in monetary theory, and provides a unified model for the analysis of unemployment and inflation. We discuss optimal fiscal and monetary policy. We then calibrate the model and discuss the extent to which it can account for salient aspects of the data. For a reasonable calibration we find that changes in monetary policy account a sizable component of the low frequency movement in unemployment.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 34.

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Date of creation: 2008
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Handle: RePEc:red:sed008:34
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htm
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