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Unemployment Persistence, Inflation and Monetary Policy in A Dynamic Stochastic Model of the Phillips Curve

George Alogoskoufis ()

No 201604, Working Papers from Athens University Of Economics and Business, Department of Economics

Abstract: This paper puts forward an alternative "new Keynesian" dynamic stochastic general equilibrium model of aggregate fluctuations. The model is characterized by one period nomi- nal wage contracts and endogenous persistence of deviations of unemployment from its natural rate. Aggregate fluctuations are analyzed under both a Taylor nominal interest rate rule and under the assumption of optimal discretionary monetary policy. Under both types of monetary policy, the per- sistence of unemployment results in persistent inflation as the central bank responds to deviations of unemployment from its natural rate. Econometric evidence from the United States since the 1890s cannot reject the main predictions of the model.

Keywords: Aggregate fluctuations; unemployment persistence; inflation; monetary policy; insiders Out- siders; natural rate (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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