Stagflation, Persistent Unemployment and the Permanence of Economic Shocks
Karl Brunner Â€,
Alex Cukierman () and
Allan H. Meltzer Â€
Credit and Capital Markets, 2019, vol. 52, issue 4, 477-504
When changes occur, people do not know how long they will persist. Using a simple stochastic structure that incorporates temporary and permanent changes in an augmented IS-LM model, we show that rising prices and rising unemployment â€“ stagflation â€“ is likely to follow a large permanent reduction to productivity. All markets clear and all expectations are rational. People learn gradually the permanent values which the economy will reach following a permanent shock and gradually adjust anticipations. In our model, optimally perceived permanent values take the form of a Koyck lag of past observations.
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Persistent link: https://EconPapers.repec.org/RePEc:kuk:journl:v:52:y:2019:i:4:p:477-504
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