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Stagflation, Persistent Unemployment and the Permanence of Economic Shocks

Karl Brunner †, Alex Cukierman () and Allan Meltzer

Credit and Capital Markets, 2019, vol. 52, issue 4, 477-504

Abstract: 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 – stagflation – 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.

Date: 2019
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Journal Article: Stagflation, persistent unemployment and the permanence of economic shocks (1980) Downloads
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Handle: RePEc:kuk:journl:v:52:y:2019:i:4:p:477-504