Kiel Working Papers, Kiel Institute for World Economics
No 1334:
Inflation and Unemployment: Lagos-Wright meets Mortensen-Pissarides
Aleksander Berentsen, Guido Menzio and Randall Wright
Abstract: Inflation and unemployment are central issues in
macroeconomics. While progress has been made on these issues recently using
models that explicitly incorporate search-type frictions, existing models
analyze either unemployment or inflation in isolation. We develop a
framework to analyze unemployment and inflation together. This makes
contributions to disparate literatures, and provides a unified model for
theory, policy, and quantitative analysis. We discuss optimal fiscal and
monetary policy. We calibrate the model, and discuss the extent to which it
can account for salient aspects of a half century’s experience with
inflation, unemployment, interest rates, and velocity. Depending on some
details concerning how one calibrations certain parameters, the model can
do a good job matching the data.
47 pages, June 2007
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