# Inflation and Unemployment in the Longrun

# (working paper)

**Abstract**

In recent years, much progress has been made studying both labor and monetary economics using theories that explicitly incorporate frictions, including search and matching frictions, noncompetitive pricing, anonymity or imperfect monitoring, etc. Models with frictions are natural for understanding dynamic labor markets and hence unemployment, as well as goods markets and the role of money. However, existing papers analyze either unemployment or money in isolation. One objective here is to provide a framework that allows us to analyze unemployment and money in an environment with logically consistent microfoundations. Although there are various ways to proceed, in terms of different approaches in the literature, here we integrate the labor market model in Dale T. Mortensen and Christopher Pissarides (1994) with the goods market model in Ricardo Lagos and (2005). The result is a very tractable framework that makes sharp predictions about many interesting effects, including the impact of inflation or interest rates on employment.

Other recent attempts to bring monetary issues to bear on search-based labor models include Farmer (2005), Olivier J. Blanchard and Jordi Gali (2008), and Mark Gertler and Antonella Trigari (2009), but they take a different tact by imposing nominal rigidities, which we do not think are so relevant for longer-run issues. Etienne Lehmann (2006), Shouyong Shi (1998,1999) and Shi and Weimin Wang (2006) are closer to our approach, although the details are different. Guillaume Rocheteau, Peter Rupert and Wright (2006) and Mei Dong (2007) use similar monetary economics but a different theory of unemployment -- Richard D. Rogerson's (1988) indivisible labor model; while that leads to some interesting results, there are reasons to prefer Mortensen-Pissarides. Earlier, Cooley and Gary D. Hansen (1989) stuck a cash-in-advance constraint into Rogerson, as Cooley and Vincenzo Quadrini (2004) and David Andolfatto, Scott Hendry and Kevin Moran (2004) do to Mortensen-Pissarides.

**Working Paper Data and Figures**

Inflation and unemployment in the longrun: paper (22.03.2008)

Inflation and unemployment in the longrun: figures (20.03.2008)

**More Figures**

Scatter plots 1955-2005 (28.02.2008)

Time series plots 1955-2005 (28.02.2008)

**Simulations**

In the paper we report results for three different values of *l*, where *l* is the value of home production. For the **UI calibration**, we assume that the unemployed are not engaged in home production. For the **BC calibration**, we choose the value of *l* such that the model's simulated ratio of the standard deviation of unemployment to the average product of labor (APL) matches the standard deviation of cyclical US unemployment relative to APL. For the **BF calibration**, we choose *l* such that the calibration minimizes the distance between the actual and predicted unemployment rates where each series is filtered.

Tables with all calibrated parameters and values for the endogenous variables.

Charts of the simulations for the different values of l.

Simulations with low elasticity of money demand (updated 10.03.2008)

BF Calibration (HP-Filter 1600)

BF Calibration (HP-Filter 160000)

Remark: mean unemployment in the data is 5.81839. The means of our simulated series are 5.74509 (HP-Filter 1600) and 5.82464 (HP-Filter 160000).

Simulations with high elasticity of money demand (updated 10.03.2008)

BF Calibration (HP-Filter 1600)

BF Calibration (HP-Filter 160000)

Remark: mean unemployment in the data is 5.81839. The means of our simulated series are 6.0102 (HP-Filter 1600) and 5.94813 (HP-Filter 160000).

**Data 1948-2005**

Excel (data that we use for the calibration)

ZIP-file (data that we use to generate the plots)

**Mathematica files **(Mathematica 5.2)

Calibration (low elasticity) Calibration (high elasticity) (28.2.2008)

Simulation (low elasticity) Simulation (high elasticity) (28.2.2008)

Scatters (generates scatter plots 1955-2005)

Time Series (generates time series plots 1955-2005)

Charts (generates the charts of the simulations, requires the package PlotDefinition1955-2005.m)

In order to run the Mathematica files the directory commands have to be adjusted accordingly.