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Credit Condition, Inflation and Unemployment

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Abstract

We study the effects of the firm's credit condition on labor market performance and the relationship between expected inflation and unemployment in a new monetarist model. Better credit condition improves labor market outcomes as firms save on their cash financing cost, improve profitability, and create more vacancies. Inflation affects unemployment through two opposing channels. First, inflation increases the firm's financing cost, which discourages job creation and increases unemployment. Second, inflation lowers wages through bargaining because unemployed workers more heavily rely on cash transactions and suffer more from inflation compared to employed workers. This encourages job creation. The overall effect of inflation on employment depends on the firm's credit condition. We calibrate the model to match U.S. data. The calibrated model suggests a downward-sloping Phillips curve with flexible wages. Finally, we find that improvement in firm credit conditions is consistent with the flattening of the Phillips curve.

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  • Chao Gu & Janet Hua Jiang & Liang Wang, 2023. "Credit Condition, Inflation and Unemployment," Working Papers 2314, Department of Economics, University of Missouri.
    • Handle: RePEc:umc:wpaper:2314
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    1. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    2. Zachary Bethune & Guillaume Rocheteau & Peter Rupert, 2015. "Aggregate Unemployment and Household Unsecured Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 77-100, January.
    3. Hooper, Peter & Mishkin, Frederic S. & Sufi, Amir, 2020. "Prospects for inflation in a high pressure economy: Is the Phillips curve dead or is it just hibernating?," Research in Economics, Elsevier, vol. 74(1), pages 26-62.
    4. Claire Greene & Julian Perry & Joanna Stavins, 2024. "Consumer Payment Behavior by Income and Demographics," Consumer Payments Research Data Reports 2024-02, Federal Reserve Bank of Atlanta.
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    Cited by:

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    2. Schütz, Marlies & Ploder, Michael & Polt, Wolfgang & Kattel, Rainer & Czarnitzki, Dirk, 2025. "Zeit für eine Industriepolitik in Deutschland? Eine Auseinandersetzung mit Rechtfertigungen, Risiken und Rahmenbedingungen," Studien zum deutschen Innovationssystem 4-2025, Expertenkommission Forschung und Innovation (EFI) - Commission of Experts for Research and Innovation, Berlin.

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    Keywords

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    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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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