Phillips curves, monetary policy, and a labor market transmission mechanism

Robert Reed () and Stacey Schreft

No RWP 07-12, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper develops a general equilibrium monetary model with performance incentives to study the inflation-unemployment relationship. A long-run downward-sloping Phillips curve can exist with perfectly anticipated inflation because workers? incentive to exert effort depend on financial market returns. Consequently, higher inflation rates can reduce wages and stimulate employment. An upward-sloping or vertical Phillips Curve can arise instead, depending on agents? risk aversion and the possibility of capital formation. Welfare might be higher away from the Friedman rule and with a central bank putting some weight on employment.

Keywords: Phillips curve; Labor market; Monetary policy; Wages (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-lab, nep-mac and nep-mon
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