On the long-run unemployment, inflation, and volatility

This paper builds up a simple New Keynesian model and revisits the relationship between unemployment and in ation in the long-run. It finds that when the labor market is affected by downward nominal wage rigidity, this relationship goes beyond the tradeoff between the first moments of unemployment and infl ation provided by the short-run Phillips curve. Higher volatility in ifln ation raises unemployment at low-frequency. Increased volatility in infl ation makes nominal wages more volatile but the rigidity constrains downward adjustments. Unemployment is more likely to increase above the natural level to guarantee the equilibrium in the labor market. The positive long-run co-movement between unemployment and infl ation volatility is confirmed when tested using data from OECD countries.