Title: Inflation and unemployment in the long run
First published: 2008
Description: "We study the long-run relation between money, measured by inflation or interest rates, and unemployment.  We first discuss data, documenting a strong positive relation between the variables at low frequencies.  We then develop a framework where both money and unemployment are modeled using explicit microfoundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets.  We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior.  The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment.  For conservative parameterizations, money accounts for some but not that much of trend unemployment -- by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone.  For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century"--National Bureau of Economic Research web site.
LC classification: HB1