For input on previous work related to this project, we thank Karl Shell, Bob Hall, Ken Burdett, Boragan Aruoba, Christian Helwig, Todd Keister, and seminar participants at the Cleveland Fed, Philadelphia Fed, Bank of Canada, Penn, Penn State, Princeton, LSE, UCLA, Cornell, Notre Dame, National University of Singapore, Simon Fraser, Essex, and the Canadian Economic Theory meetings at UBC. We thank the NSF for research support. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.
Inflation and Unemployment in General Equilibrium*
Article first published online: 25 FEB 2008
© The editors of the Scandinavian Journal of Economics 2008
The Scandinavian Journal of Economics
Volume 109, Issue 4, pages 837–855, December 2007
How to Cite
Rocheteau, G., Rupert, P. and Wright, R. (2007), Inflation and Unemployment in General Equilibrium. The Scandinavian Journal of Economics, 109: 837–855. doi: 10.1111/j.1467-9442.2007.00511.x
- Issue published online: 25 FEB 2008
- Article first published online: 25 FEB 2008
- Phillips curve;
When labor is indivisible, there exist efficient outcomes with some agents randomly unemployed, as in Rogerson (1988). We integrate this idea into the modern theory of monetary exchange, where some trade occurs in centralized markets and some in decentralized markets, as in Lagos and Wright (2005). This delivers a general equilibrium model of unemployment and money, with explicit microeconomic foundations. We show that the implied relation between inflation and unemployment can be positive or negative, depending on simple preference conditions. Our Phillips curve provides a long-run, exploitable, trade-off for monetary policy; it turns out, however, that the optimal policy is the Friedman rule.