Labor Markets, Unemployment and Optimal Inflation

Alok Kumar ()

No 1303, Department Discussion Papers from Department of Economics, University of Victoria

Abstract: The optimal infation rate and the relationship between inflation and unemployment are central issues in macroeconomics. It is widely accepted that inflation is a monetary phenomenon. However, there is little consensus with regard to unemployment. Economists differ widely in their view of labor markets and wage-setting mechanisms. The present paper develops a search-theoretic monetary model with imperfect labor markets. It studies the issue of the optimal inflation rate and the relationship between inflation and unemployment under four widely used wage-setting mechanisms: search and matching, wage posting, union bargaining, and efficiency wage. It finds that a higher inflation rate reduces output and employment under all wage setting mechanisms. The Friedman rule is not optimal under any wage setting mechanism except wage posting.

Keywords: search-theoretic monetary model; inflation; unemployment; Friedman Rule; search and matching; wage posting; unions; efficiency wage (search for similar items in EconPapers)
JEL-codes: E30 E40 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2013-12-17
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Note: ISSN 1914-2838
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:vic:vicddp:1303

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