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American Economic Review Vol. 101 No. 1 2011

Inflation and Unemployment in the Long Run

Aleksander Berentsen1; Guido Menzio2; Randall Wright3

1 Faculty of Business and Economics, University of Basel, Peter-Merian-Weg 6, Postfach, CH-4002 Basel, Switzerland. · 2 Department of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104. · 3 Department of Finance and Department of Economics, University of Wisconsin–Madison, 975 University Ave., Madison, WI 53706, and Federal Reserve Bank of Minneapolis, 90 Hennepin Ave., Minneapolis, MN 55401.

Abstract

We study the long-run relation between money (inflation or interest rates) and unemployment. We document positive relationships between these variables at low frequencies. We develop a framework where money and unemployment are modeled using explicit microfoundations, providing a unified theory to analyze labor and goods markets. We calibrate the model and ask how monetary factors account for labor market behavior. We can account for a sizable fraction of the increase in unemployment rates during the 1970s. We show how it matters whether one uses monetary theory based on the search-and-bargaining approach or on an ad hoc cash-in-advance constraint.

DOI
10.1257/aer.101.1.371
Volume
101
Issue
1
Pages
371-398
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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