The role of search frictions in the long-run relationships between inflation, unemployment and capital

Gomis‐Porqueras, Pedro; Huangfu, Stella; Sun, Hongfei

doi:10.1016/j.euroecorev.2020.103396

“…Our paper contributes to the research on the welfare cost of inflation in micro-founded models of money demand, starting with the work by Lagos and Wright (2005). Our work complements a growing literature combining goods and labor market frictions to study the effects of monetary policy on unemployment, starting with Berentsen et al (2011) and developed in work such as Gomis-Porqueras et al (2013), Rocheteau and Rodriguez-Lopez (2014), Bethune et al (2015), Gu et al (2021), Bethune and Rocheteau (2017), Dong and Xiao (2019), Ait Lahcen (2020), Gomis-Porqueras et al (2020), He and Zhang (2020), and Jung and Pyun (2020), among others. As mentioned above, this literature has largely viewed short-run volatility as orthogonal to the long-run welfare effect of anticipated inflation.…”

Section: Relationship To Literaturementioning

confidence: 88%

Nonlinear Unemployment Effects of the Inflation Tax

Lahcen

¹

,

Baughman

²

,

Rabinovich

³

et al. 2021

SSRN Journal

0

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We argue that long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks -productivity and monetary -and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the US postwar labor market and monetary data and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks.

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“…Our paper contributes to the research on the welfare cost of inflation in micro-founded models of money demand, starting with the work by Lagos and Wright (2005). Our work complements a growing literature combining goods and labor market frictions to study the effects of monetary policy on unemployment, starting with Berentsen et al (2011) and developed in work such as Gomis-Porqueras et al (2013), Rocheteau and Rodriguez-Lopez (2014), Bethune et al (2015), Gu et al (2021), Bethune and Rocheteau (2017), Dong and Xiao (2019), Ait Lahcen (2020), Gomis-Porqueras et al (2020), He and Zhang (2020), and Jung and Pyun (2020), among others. As mentioned above, this literature has largely viewed short-run volatility as orthogonal to the long-run welfare effect of anticipated inflation.…”

Section: Relationship To Literaturementioning

confidence: 90%

Nonlinear Unemployment Effects of the Inflation Tax

Ait Lahcen,

van Buggenum,

Rabinovich

et al. 2021

SSRN Journal

0

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“…In our model, a reverse MT-E may also occur for some parameters, but due to preferences, not frictional markets. Gomis-Porqueras et al (2020) show that there is a hump-shaped relationship between inflation and aggregate capital, as inflation affects capital accumulation negatively on the extensive margin by reducing the number of firms, besides the usual positive effect on the intensive margin. Probably the paper most closely related to ours is Matsuoka and Watanabe (2019), who build on Williamson (2012).…”

Section: Model Summarymentioning

confidence: 95%

Liquidity, the Mundell–Tobin Effect, and the Friedman Rule

Altermatt

¹

,

Wipf

²

2022

J of Money Credit Banking

1

0

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We investigate how the Mundell-Tobin effect, i.e., a positive relation between inflation and capital investment, changes the optimal monetary policy prescription in a framework that combines overlapping generations and new monetarist models. We find that the Friedman rule is optimal if and only if there is no Mundell-Tobin effect. A Mundell-Tobin effect is more likely to occur at the Friedman rule if capital is relatively liquid, and if the agents' risk aversion is relatively low. If the Friedman rule is not optimal, the optimal money growth rate lies between the Friedman rule and a constant money stock. We also show that it is more efficient to implement deflationary monetary policies by raising lump-sum taxes on old agents only.

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The role of search frictions in the long-run relationships between inflation, unemployment and capital

Cited by 9 publications

References 39 publications

Nonlinear Unemployment Effects of the Inflation Tax

Nonlinear Unemployment Effects of the Inflation Tax

Nonlinear Unemployment Effects of the Inflation Tax

Liquidity, the Mundell–Tobin Effect, and the Friedman Rule

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