Abstract:This paper offers a reappraisal of the inflation-unemployment tradeoff, based on "frictional growth," describing the interplay between nominal frictions and money growth. When the money supply grows in the presence of price inertia (due to staggered wage contracts with time discounting), the price adjustments to each successive change in the money supply are never able to work themselves out fully. In this context, monetary shocks have a gradual and delayed effect on inflation, and these shocks also generate p… Show more
“…3 8 See Karanassou et al (2005) for an empirical appraisal of the long-run Phillips curve, or Beyer and Farmer (2007) for a positive empirical relationship between inflation and unemployment. Vaona (2012) finds empirical support for a negative relationship between inflation and output growth.…”
Section: The Cost Of Price Dispersion and The Long-run Implications Omentioning
Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target an inflation rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this survey, we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers. We first review empirical research on the evolution and dynamics of U.S. trend inflation and some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. We then construct a Generalized New Keynesian model that accounts for a positive trend inflation. In this model an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long-run inflation target.
“…3 8 See Karanassou et al (2005) for an empirical appraisal of the long-run Phillips curve, or Beyer and Farmer (2007) for a positive empirical relationship between inflation and unemployment. Vaona (2012) finds empirical support for a negative relationship between inflation and output growth.…”
Section: The Cost Of Price Dispersion and The Long-run Implications Omentioning
Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target an inflation rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this survey, we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers. We first review empirical research on the evolution and dynamics of U.S. trend inflation and some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. We then construct a Generalized New Keynesian model that accounts for a positive trend inflation. In this model an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long-run inflation target.
“…80 Karanassou, Sala and Snower (2003) find considerable long-run trade-off between inflation and unemployment in a model with nominal price staggering and money growth.…”
“…The results also showed that in those countries where long-term unemployment was high, the long-term unemployment played a little role in the setting of prices and wages. Karanassou, Sala, & Snower (2005) re-examined the interactive relationship between inflation and www.ccsenet.org/ijef International Journal of Economics and Finance Vol. 5, No.…”
Section: Theoretical and Empirical Literature About Inflation-unemplomentioning
The main objective of this study is to investigate the long run trade-off between unemployment and inflation in Egypt through the period (1974-2011) using Johansen-Juselius (1990 cointegration test and Vector Error Correction Model (VECM). Results of ADF test indicate that both series are cointegrated of order one I(1). Add to that, the outcomes of cointegration analysis confirm a positive relationship between changes in inflation rate and unemployment gap in the long run, which is consistent with "Locus Critique" where a policy of inflation would fail to reduce the unemployment rate in the long run, because workers would eventually adjust their expectations of inflation. Results of the ECM have illustrated that the error-correction term is negative and significant with an adjustment coefficient of -0.280, pointing out that changes in inflation rate adjust to its equilibrium level in the long run with 28% of the adjustment taking place within the first year.
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