The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties

35 Pages Posted: 13 Jul 2007

See all articles by Marika Karanassou

Marika Karanassou

University of London, Queen Mary - Department of Economics; Institute for the Study of Labor (IZA)

Hector Sala

Autonomous University of Barcelona - Department of Applied Economics; IZA Institute of Labor Economics

Dennis J. Snower

University of Kiel - Institute for World Economics (IfW); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2007

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 examine the interaction between money growth (on the one hand) and various real and nominal frictions (on the other). 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.

Keywords: inflation dynamics, unemployment dynamics, Phillips curve, roaring nineties

JEL Classification: E24, E31, E51, E62

Suggested Citation

Karanassou, Marika and Sala Lorda, Hector and Snower, Dennis J., The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties (July 2007). IZA Discussion Paper No. 2900, Available at SSRN: https://ssrn.com/abstract=1000374 or http://dx.doi.org/10.2139/ssrn.1000374

Marika Karanassou

University of London, Queen Mary - Department of Economics ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 20 7975 5090 (Phone)
+44 20 7983 3580 (Fax)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Hector Sala Lorda (Contact Author)

Autonomous University of Barcelona - Department of Applied Economics ( email )

Departament d'Economia Aplicada
Bellaterra, 08193
Spain
+34 93 581 2779 (Phone)
+34 93 581 2292 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Dennis J. Snower

University of Kiel - Institute for World Economics (IfW) ( email )

Duesternbrooker Weg 120
D-24118 Kiel
Germany
+49+431-8814-235 (Phone)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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