Inflation and unemployment: Lagos-Wright meets Mortensen-Pissarides

Randall Wright, Guido Menzio and Aleksander Berentsen

No 237, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: Inflation and unemployment are central issues in macroeconomics. While much progress has been made on these issues by incorporating frictions using search theory, existing models analyze either unemployment or inflation. We develop a framework to analyze unemployment and inflation together. This makes contributions to disparate literatures, and provides a united model for theory, policy, and quantitative analysis. We discuss optimal fiscal and monetary policy. We calibrate the model, and discuss the extent to which it can account for salient aspects of a half century's experience with ination, unemployment, interest rates, and velocity.

Date: 2007
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