Inflation and Unemployment in the Long Run

Aleksander Berentsen, Guido Menzio and Randall Wright

No 13924, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first discuss data, documenting a strong positive relation between the variables at low frequencies. We then develop a framework where both money and unemployment are modeled using explicit microfoundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets. We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior. The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment. For conservative parameterizations, money accounts for some but not that much of trend unemployment -- by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone. For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century.

JEL-codes: E24 E52 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pke
Note: EFG LS ME
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Citations: View citations in EconPapers (12)

Published as Aleksander Berentsen & Guido Menzio & Randall Wright, 2011. "Inflation and Unemployment in the Long Run," American Economic Review, American Economic Association, vol. 101(1), pages 371-98, February.

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Journal Article: Inflation and Unemployment in the Long Run (2011)
Working Paper: Inflation and Unemployment in the Long Run (2008)
Working Paper: Inflation and Unemployment in the Long Run (2008)
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