Inflation, Unemployment and Economic Growth in a Schumpeterian Economy

Angus Chu, Guido Cozzi and Yuichi Furukawa

No 1323, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

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 O30 O40 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2013-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-1324.pdf (application/pdf)

Related works:
Journal Article: Inflation, Unemployment, and Economic Growth in a Schumpeterian Economy (2021)
Working Paper: Inflation, Unemployment and Economic Growth in a Schumpeterian Economy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2013:24

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