THE EVOLUTION OF INFLATION AND UNEMPLOYMENT: EXPLAINING THE ROARING NINETIES |
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| Authors: | MARIKA KARANASSOU HECTOR SALA DENNIS J SNOWER |
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| Institution: | 1. Queen Mary,University of London and IZA;2. Universitat Autònoma de Barcelona and IZA;3. Hector Sala is grateful to the Spanish Ministry of Education and Science for financial support through grant SEJ2006‐14849/ECON.;4. Kiel Institute for the World Economy, Christian Albrechts University of Kiel CEPR and IZA |
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| Abstract: | This paper analyses the relation between US inflation and unemployment from the perspective of ‘frictional growth,’ a phenomenon arising from the interplay between growth and frictions. In particular, we focus on the interaction between money growth and nominal frictions. In this context we show that monetary policy has not only persistent, but permanent real effects, giving rise to a long‐run inflation‐unemployment tradeoff. We evaluate this tradeoff empirically and assess the impact of productivity, money growth, budget deficit, and trade deficit on the US unemployment and inflation trajectories during the nineties. |
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