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Inflation, Redistribution, and Real Activities

Empirical evidence suggests that inflation has positive effect on both output and unemployment in the long run in the United States. This paper develops a monetary model in which a higher inflation rate increases both output and unemployment. The model has two key features: (i) separation between workers and owners of firms (employers) and (ii) endogenous labor force participation. Changes in money supply redistributes consumption between employers and workers. This redistribution along with endogenous labor force participation creates a channel by which a higher inflation rate increases output, unemployment, and labor force participation. The Friedman rule does not maximize social welfare.

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File URL: http://www.uvic.ca/socialsciences/economics/assets/docs/discussion/ddp1302.pdf
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Paper provided by Department of Economics, University of Victoria in its series Department Discussion Papers with number 1302.

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Length: 39 pages
Date of creation: 17 Dec 2013
Handle: RePEc:vic:vicddp:1302
Note: ISSN 1914-2838
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PO Box 1700, STN CSC, Victoria, BC, Canada, V8W 2Y2

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Web page: http://web.uvic.ca/econ

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  7. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, vol. 41(6), pages 1201-1249, June.
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  18. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
  19. Derek Laing & Victor E. Li & Ping Wang, 2000. "Inflation, trade frictions, and productive activity in a multiple-matching model of money," FRB Atlanta Working Paper 2000-28, Federal Reserve Bank of Atlanta.
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  22. Shi, Shouyong & Wen, Quan, 1999. "Labor market search and the dynamic effects of taxes and subsidies," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 457-495, April.
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