Labor Markets, Unemployment and Optimal Inflation
The optimal infation rate and the relationship between inflation and unemployment are central issues in macroeconomics. It is widely accepted that inflation is a monetary phenomenon. However, there is little consensus with regard to unemployment. Economists differ widely in their view of labor markets and wage-setting mechanisms. The present paper develops a search-theoretic monetary model with imperfect labor markets. It studies the issue of the optimal inflation rate and the relationship between inflation and unemployment under four widely used wage-setting mechanisms: search and matching, wage posting, union bargaining, and efficiency wage. It finds that a higher inflation rate reduces output and employment under all wage setting mechanisms. The Friedman rule is not optimal under any wage setting mechanism except wage posting.
|Date of creation:||17 Dec 2013|
|Date of revision:|
|Contact details of provider:|| Postal: PO Box 1700, STN CSC, Victoria, BC, Canada, V8W 2Y2|
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- Berentsen, Aleksander & Menzio, Guido & Wright, Randall D., 2007.
"Inflation and Unemployment: Lagos-Wright meets Mortensen-Pissarides,"
Kiel Working Papers
1334, Kiel Institute for the World Economy (IfW).
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"Competitive Search Equilibrium,"
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"Money and Prices: A Model of Search and Bargaining,"
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Elsevier, vol. 67(2), pages 467-496, December.
- Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
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