Credit Conditions, Inflation, and Unemployment

Chao Gu, Janet Hua Jiang and Liang Wang

Staff Working Papers from Bank of Canada

Abstract: We construct a New Monetarist model with labor market search and identify two channels that affect the long-term relationship between inflation and unemployment. First, inflation lowers wages through bargaining because unemployed workers rely more heavily on cash transactions and suffer more from inflation than employed workers: this wage-bargaining channel generates a downward Phillips curve without assuming nominal rigidity. Second, inflation increases the firm’s financing costs, which discourages job creation and increases unemployment; this cash-financing channel leads to an upward-sloping Phillips curve. We calibrate our model to the U.S. economy. The improvement in firm financing conditions can explain the observation that the slope of the long-run Phillips curve has switched from positive to negative post-2000.

Keywords: Business fluctuations and cycles; Credit and credit aggregates; Inflation and prices; Labour markets (search for similar items in EconPapers)
JEL-codes: E24 E31 E44 E51 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2025-09
New Economics Papers: this item is included in nep-lab, nep-mac and nep-mon
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Working Paper: Credit Condition, Inflation and Unemployment (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:25-26

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