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What Drives US Inflation and Unemployment in the Long Run?

Antonio Ribba ()

Economics Bulletin, 2017, vol. 37, issue 2, 765-777

Abstract: There is a growing consensus on the existence of a positive, long-run relation between inflation and unemployment in the US economy. However, the conclusion that the two variables move in the same direction at low frequencies leaves open the question of the identification of the factors - real or, alternatively, monetary - underlying this co-movement. In this paper we try to shed light on this question by adopting a structural VAR agnostic approach. The important finding is that in the postwar US economy an important role, though not a pre-eminent one, has been played by supply shocks in shaping the long-run evolution of unemployment. This result is robust to alternative choices of the money supply index. Thus, the main conclusion arising from our empirical results is that any monothematic explanation of the long-run relation between inflation and unemployment is difficult to reconcile with US postwar data. A second, important result shown by this investigation concerns the presence of a pronounced liquidity effect in the US economy.

Keywords: Long-run Unemployment; Inflation; Structural VARs (search for similar items in EconPapers)
JEL-codes: E3 C5 (search for similar items in EconPapers)
Date: 2017-04-22
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