Credit conditions, inflation, and unemployment

Chao Gu, Janet Hua Jiang and Liang Wang

Journal of Economic Theory, 2025, vol. 230, issue C

Abstract: We construct a New Monetarist model with labor market search and identify two channels that affect the long-run 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-sloping Phillips curve without assuming nominal rigidity. Second, inflation increases firms' 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: Credit conditions; Inflation; Liquidity; Money; Phillips curve; Unemployment (search for similar items in EconPapers)
JEL-codes: E24 E31 E44 E51 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:230:y:2025:i:c:s0022053125001279

DOI: 10.1016/j.jet.2025.106081

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