Microeconomic Foundation for Phillips Curve with a Three-Period Overlapping Generations Model and Negative Real Balance Effect

Yasuhito Tanaka

Central European Economic Journal, 2021, vol. 8, issue 55, 163-175

Abstract: We show a negative relation between the inflation rate and the unemployment rate, that is, the Phillips curve using a three-period overlapping generations (OLG) model with childhood period and pay-as-you-go pension for older generation under monopolistic competition with negative real balance effect. In a three-period OLG model, there may exist a negative real balance effect because consumers have debts and savings. A fall (or rise) in the nominal wage rate induces a fall (or rise) in the price, then by negative real balance effect, the unemployment rate rises (or falls), and we get a negative relation between the inflation rate and the unemployment rate. This conclusion is based on the premise of utility maximisation of consumers and profit maximisation of firms. Therefore, we present a microeconomic foundation for the Phillips curve. We also examine the effects of fiscal policy financed by seigniorage, which is represented by left-ward shift of the Phillips curve.

Keywords: microeconomic foundation; monopolistic competition; negative real balance effect; Phillips curve; a three-period overlapping generations model (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Microeconomic foundation for Phillips curve with three-periods overlapping generations model and negative real balance effect (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:ceuecj:v:8:y:2021:i:55:p:163-175:n:6

DOI: 10.2478/ceej-2021-0010

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