This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  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)
Download Full Text PDF

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