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  3. American Economic Review
  4. February 2011
  5. Inflation and Unemployment in the Long Run

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Inflation and Unemployment in the Long Run

  • Aleksander Berentsen
  • Guido Menzio
  • Randall Wright
American Economic Review
vol. 101, no. 1, February 2011
(pp. 371–98)
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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. (JEL E24, E31, E41, E43, E52)

Citation

Berentsen, Aleksander, Guido Menzio, and Randall Wright. 2011. "Inflation and Unemployment in the Long Run." American Economic Review 101 (1): 371–98. DOI: 10.1257/aer.101.1.371

Additional Materials

JEL Classification

  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
  • E31 Price Level; Inflation; Deflation
  • E41 Demand for Money
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy