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AuthorMohammed, Ait Lahcen
AuthorBaughman, Garth
AuthorRabinovich, Stanislav
Authorvan Buggenum, Hugo
Available date2023-02-12T06:39:59Z
Publication Date2022-07-26
Publication NameEuropean Economic Review
Identifierhttp://dx.doi.org/10.1016/j.euroecorev.2022.104247
CitationLahcen, M. A., Baughman, G., Rabinovich, S., & van Buggenum, H. (2022). Nonlinear unemployment effects of the inflation tax. European Economic Review, 148, 104247.
ISSN0014-2921
URIhttps://www.sciencedirect.com/science/article/pii/S0014292122001465
URIhttp://hdl.handle.net/10576/39958
AbstractLong-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. We show this using a standard monetary search model with two shocks – productivity and monetary – and frictions in both labor and goods markets. Inflation lowers the surplus from a worker–firm match, in turn making it more sensitive to both productivity shocks and further increases in inflation. We calibrate the model to match key aspects of the US labor market and monetary data. The calibrated model is consistent with a number of empirical correlations, which we document using panel data from the OECD: (1) there is a positive long-run relationship between anticipated inflation and unemployment; (2) there is also a positive correlation between anticipated inflation and unemployment volatility; (3) the long-run inflation-unemployment relationship is stronger when unemployment is higher. The key mechanism through which the model generates these results is the negative effect of inflation on measured output per worker, which is likewise consistent with cross-country data. Finally, we show that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate uncertainty.
Languageen
PublisherElsevier
SubjectMoney
Search
Inflation
Unemployment volatility
Product–labor market interaction
TitleNonlinear unemployment effects of the inflation tax
TypeArticle
Volume Number148
Open Access user License http://creativecommons.org/licenses/by-nc-nd/4.0/
ESSN1873-572X
dc.accessType Abstract Only


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