Credit Conditions, Inflation, and Unemployment

Chao Gu (), Janet Hua Jiang () and Liang Wang ()
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Chao Gu: University of Missouri
Janet Hua Jiang: Bank of Canada
Liang Wang: University of Hawaii

No 202503, Working Papers from University of Hawaii at Manoa, Department of Economics

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: 2025-09
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