A long-run approach to money, unemployment, and equity prices

Kuk Mo Jung and Ju Hyun Pyun

Economic Modelling, 2023, vol. 125, issue C

Abstract: We propose a search and matching model that can account for a long-run joint relationship between inflation, unemployment, and equity prices. The model predicts the following long-run joint relationship: (i) a positive relationship between inflation and unemployment; (ii) a negative relationship between unemployment and equity prices; and (iii) a negative relationship between inflation and equity prices. Empirical evidence for this trivariate relationship in the post-WWII US data has been documented in previous studies. We reconfirm this evidence with expanded dataset. Furthermore, our calibration exercises show that the model results driven solely by US monetary policy can account for 62.9% and 29.8% of variations of the long-term trends of US unemployment rate and real equity prices, respectively.

Keywords: Inflation; Unemployment; Equity prices; Search models (search for similar items in EconPapers)
JEL-codes: E40 E50 G18 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:125:y:2023:i:c:s0264999323001499

DOI: 10.1016/j.econmod.2023.106337

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