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Unemployment and the demand for money


  • Samuel Huber
  • Jaehong Kim
  • Alessandro Marchesiani


We develop a dynamic general equilibrium model to analyze the relationship between monetary policy, money demand, and unemployment. Our model succeeds in replicating the empirical fact of a downward sloping Phillips curve for low infl ation rates and an upward sloping curve for high inflation rates. The reason is that low in flation rates make saving, as opposed to consumption, more attractive. Less consumption is associated with less output and therefore higher unemployment. To the contrary, when inflation exceeds a certain threshold, money is too costly to hold, which results in a decrease in output and an increase in unemployment.

Suggested Citation

  • Samuel Huber & Jaehong Kim & Alessandro Marchesiani, 2019. "Unemployment and the demand for money," ECON - Working Papers 324, Department of Economics - University of Zurich.
  • Handle: RePEc:zur:econwp:324

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    References listed on IDEAS

    1. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    2. Brent Meyer & Murat Tasci, 2012. "An unstable Okun’s Law, not the best rule of thumb," Economic Commentary, Federal Reserve Bank of Cleveland, issue June.
    3. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    4. Guillaume Rocheteau & Pierre-Olivier Weill & Tsz-Nga Wong, 2018. "An Heterogeneous-Agent New-Monetarist Model with an Application to Unemployment," NBER Working Papers 25220, National Bureau of Economic Research, Inc.
    5. Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2018. "Limited Commitment and the Demand for Money," Economic Journal, Royal Economic Society, vol. 128(610), pages 1128-1156, May.
    6. Mingyu Chen & Yi Wen, 2012. "Okun’s law: a meaningful guide for monetary policy?," Economic Synopses, Federal Reserve Bank of St. Louis.
    7. Huber, Samuel & Kim, Jaehong, 2020. "An overlapping generations model for monetary policy analysis," European Economic Review, Elsevier, vol. 125(C).
    8. Zhu, Tao, 2008. "An overlapping-generations model with search," Journal of Economic Theory, Elsevier, vol. 142(1), pages 318-331, September.
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    More about this item


    Money; infl ation; overlapping generations; unemployment;

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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