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Equilibrium Unemployment, Job Flows, and Inflation Dynamics


  • I wish to thank Mark Gertler, Ricardo Lagos, and Vincenzo Quadrini for their guidance. I am also indebted to Jean Boivin, Fabio Canova, Marc Giannoni, Thomas Sargent, Ulf Soderstrom, Gianluca Violante, and Raf Wouters for helpful suggestions and discussions. Many thanks also to an anonymous referee. This paper finally benefited from comments by participants at various seminars. Remaining errors are my responsibility.


In order to explain the joint fluctuations of output, inflation and the labor market, this paper develops and estimates a general equilibrium model that integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. The estimated model accounts for the responses of employment, hours per worker, job creation, and job destruction to a monetary policy shock. Moreover, search frictions in the labor market generate a lower elasticity of marginal costs with respect to output. This helps to explain the sluggishness of inflation and the persistence of output that are observed in the data.