TY  - JOUR
AU  - Berentsen,Aleksander
AU  - Menzio,Guido
AU  - Wright,Randall
TI  - Inflation and Unemployment in the Long Run
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13924
PY  - 2008
Y2  - April 2008
UR  - http://www.nber.org/papers/w13924
L1  - http://www.nber.org/papers/w13924.pdf
N1  - Author contact info:
Aleksander Berentsen
University of Basel
E-Mail: aleksander.berentsen@unibas.ch

Guido Menzio
Department of Economics
University of Pennsylvania
467 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
Tel: 773/865-6337
Fax: 215/573-2057
E-Mail: gmenzio@econ.upenn.edu

Randall Wright
Department of Finance and Department of Economics
University of Wisconsin - Madison
Grainger Hall
975 University Ave
Madison, WI 53706
E-Mail: rwright@bus.wisc.edu
AB  - 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.
ER  -