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:|
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- Moen, E.R., 1995.
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37/1995, Oslo University, Department of Economics.
- Shouyong Shi, 1995.
"Money and Prices: A Model of Search and Bargaining,"
916, Queen's University, Department of Economics.
- Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
- Shi, Shouyong, 1998.
"Search for a Monetary Propagation Mechanism,"
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Elsevier, vol. 81(2), pages 314-352, August.
- 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).
- Aleksander Berentsen & Guido Menzio & Randall Wright, 2007. "Inflation and Unemployment: Lagos-Wright meets Mortensen-Pissarides," Kiel Working Papers 1334, Kiel Institute for the World Economy.
- Randall Wright & Guido Menzio & Aleksander Berentsen, 2007. "Inflation and unemployment: Lagos-Wright meets Mortensen-Pissarides," 2007 Meeting Papers 237, Society for Economic Dynamics.
- Julien, B. & Kennes, J. & King, I., 1998.
"Bidding for Labour,"
dp98-03, Department of Economics, Simon Fraser University.
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