Inflation and Unemployment in the Long Run
We study the long run (low frequency) dynamic relationship between money, as measured by inflation or interest rates, and unemployment. We first discuss the data. We then develop a framework where money and unemployment are both modeled with microfoundations based on explicit frictions. This integrates and extends recent work in macro-labor economics and in monetary theory, and provides a unified model for the analysis of unemployment and inflation. We discuss optimal fiscal and monetary policy. We then calibrate the model and discuss the extent to which it can account for salient aspects of the data. For a reasonable calibration we find that changes in monetary policy account a sizable component of the low frequency movement in unemployment.
Year of publication: |
2008
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Authors: | Wright, Randall ; Menzio, Guido ; Berentsen, Aleksander |
Institutions: | Society for Economic Dynamics - SED |
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