American Economic Review: Vol. 101 No. 1 (February 2011)


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Inflation and Unemployment in the Long Run

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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


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)

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Berentsen, Aleksander (U Basel)
Menzio, Guido (U PA)
Wright, Randall (U WI and Federal Reserve Bank of Minneapolis)

JEL Classifications

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

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