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Inflation and Unemployment in the Long Run

Author

Listed:
  • Randall Wright

    (University of Pennsylvania)

  • Guido Menzio

    (University of Pennsylvania)

  • Aleksander Berentsen

    (University of Basel)

Abstract

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.

Suggested Citation

  • Randall Wright & Guido Menzio & Aleksander Berentsen, 2008. "Inflation and Unemployment in the Long Run," 2008 Meeting Papers 34, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:34
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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