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Inflation and Unemployment in the Long Run


Berentsen, Aleksander; Menzio, Guido; Wright, Randall (2009). Inflation and Unemployment in the Long Run. Working paper series / Institute for Empirical Research in Economics No. 442, University of Zurich.

Abstract

We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first document in the data a positive relation between these variables at low frequencies. We then develop a framework where unemployment and money are both modeled using microfoundations based on search and bargaining theory, providing a unified theory for analyzing labor and goods markets. The calibrated model shows that money can account for a sizable fraction of trends in unemployment. We argue it matters, qualitativelynand quantitatively, whether one uses monetary theory based on search and bargaining, or an alternative ad hoc specification.

Abstract

We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first document in the data a positive relation between these variables at low frequencies. We then develop a framework where unemployment and money are both modeled using microfoundations based on search and bargaining theory, providing a unified theory for analyzing labor and goods markets. The calibrated model shows that money can account for a sizable fraction of trends in unemployment. We argue it matters, qualitativelynand quantitatively, whether one uses monetary theory based on search and bargaining, or an alternative ad hoc specification.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:September 2009
Deposited On:29 Nov 2011 20:09
Last Modified:12 Aug 2017 12:47
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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