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Inflation, Unemployment and Economic Growth in a Schumpeterian Economy

  • Chu, Angus C.


  • Cozzi, Guido


  • Furukawa, Yuichi


This study analyzes the effects of inflation on the long-run nexus between unemployment and economic growth. We introduce money demand via a cash-in-advance (CIA) constraint on R&D investment into a scale-invariant Schumpeterian growth model with matching frictions in the labor market. Given the CIA constraint on R&D, a higher inflation that raises the opportunity cost of cash holdings leads to a decrease in innovation and economic growth, which in turn decreases labor-market tightness and increases unemployment. In summary, the model predicts a positive relationship between inflation and unemployment, a negative relationship between inflation and R&D, and a negative relationship between inflation and economic growth. These theoretical predictions are consistent with recent empirical evidence. Therefore, when inflation is a fundamental variable that affects the economy, unemployment and economic growth exhibit a negative relationship.

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Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1323.

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Length: 22 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:usg:econwp:2013:24
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