Unemployment and the Distribution of Liquidity

Zachary Bethune and Guillaume Rocheteau

Journal of Political Economy Macroeconomics, 2023, vol. 1, issue 4, 742 - 787

Abstract: We study the long-run effects of money creation and inflation in a New Monetarist model of unemployment in which distributional considerations matter. Households face employment and expenditure risk and self-insure by accumulating assets with different liquidities and returns. Inflation affects unemployment primarily through two channels: an aggregate-demand channel, through which inflation reduces households’ liquid wealth and firms’ expected revenue, and an interest-rate channel, through which inflation affects firms’ financial discount rate. Quantitatively, the aggregate-demand channel dominates and the long-run Phillips curve has a positive slope—inflation increases unemployment—although inflation can have large redistributive effects and increase aggregate welfare.

Date: 2023
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