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Inflation, Unemployment and Economic Growth in a Schumpeterian Economy

Angus Chu (), Guido Cozzi () and Yuichi Furukawa ()

MPRA Paper from University Library of Munich, Germany

Abstract: This study analyzes the effects of inflation on the long-run nexus between unemployment and economic growth. We introduce money demand via a cash-in-advance (CIA) constraint on R&D investment into a scale-invariant Schumpeterian growth model with matching frictions in the labor market. Given the CIA constraint on R&D, a higher inflation that raises the opportunity cost of cash holdings leads to a decrease in innovation and economic growth, which in turn decreases labor-market tightness and increases unemployment. In summary, the model predicts a positive relationship between inflation and unemployment, a negative relationship between inflation and R&D, and a negative relationship between inflation and economic growth. These theoretical predictions are consistent with recent empirical evidence. Therefore, when inflation is a fundamental variable that affects the economy, unemployment and economic growth exhibit a negative relationship.

Keywords: inflation; unemployment; innovation; economic growth. (search for similar items in EconPapers)
JEL-codes: E24 E41 O3 O4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-ino and nep-mac
Date: 2013-10
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https://mpra.ub.uni-muenchen.de/50510/1/MPRA_paper_50510.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/61175/1/MPRA_paper_61175.pdf revised version (application/pdf)

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Working Paper: Inflation, Unemployment and Economic Growth in a Schumpeterian Economy (2013) Downloads
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