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Money, Inflation, and Unemployment in the Presence of Informality

Mohammed Ait Lahcen ()

Annual Conference 2018 (Freiburg, Breisgau): Digital Economy from Verein für Socialpolitik / German Economic Association

Abstract: This paper studies the impact of informality on the long-run relationship between inflation and unemployment in developing economies. I present a dynamic general equilibrium model with informality in both labor and goods markets and where money and credit coexist. An increase in inflation affects unemployment through two channels: the entry channel (size) and the hiring channel (composition). On one hand, higher inflation reduces the surplus of monetary trades thus lowering firms entry and increasing unemployment. On the other hand, it shifts firms hiring decision from high separation informal jobs to low separation formal jobs thus reducing unemployment. The net effect depends on the difference in separation rates and the availability of credit in formal transactions. The model is calibrated to match certain long-run statistics of the Brazilian economy. Numerical results indicate that inflation has a small negative effect on unemployment while producing a significant impact on labor allocation between formal and informal jobs. These results point to the importance of accounting for informality when considering the inflation-unemployment trade-off in the conduct of monetary policy.

Keywords: informality; Phillips curve; money; labor; search and matching (search for similar items in EconPapers)
JEL-codes: E26 E41 J64 H26 O17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-iue, nep-mac and nep-mon
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc18:181578

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