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Growth and unemployment in the presence of trend inflation

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  • Tesfaselassie, Mewael

Abstract

The standard search model of unemployment predicts, under plausible assumptions about household preferences, that disembodied technological progress leads to higher unemployment. This prediction is at odds with the experience of industrialized countries in the 1970s. This paper shows that augmenting the model with nominal price rigidity goes towards reconciling the model's prediction. In the presence of nominal price rigidity faster growth is shown to lead to lower unemployment if the rate of inflation is relatively high, as was the case in the 1970s. In general, the effect of growth on unemployment is shown to be non-monotonic. There is a threshold level of inflation below (above) which faster growth leads to higher (lower) unemployment.

Suggested Citation

  • Tesfaselassie, Mewael, 2014. "Growth and unemployment in the presence of trend inflation," Kiel Working Papers 1978, Kiel Institute for the World Economy (IfW Kiel).
  • Handle: RePEc:zbw:ifwkwp:1978
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    References listed on IDEAS

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    8. Amano, Robert & Moran, Kevin & Murchison, Stephen & Rennison, Andrew, 2009. "Trend inflation, wage and price rigidities, and productivity growth," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 353-364, April.
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    Cited by:

    1. Tesfaselassie, Mewael F., 2016. "The impact of disembodied technological progress on working hours," Kiel Working Papers 2026, Kiel Institute for the World Economy (IfW Kiel).
    2. Lechthaler, Wolfgang & Tesfaselassie, Mewael F., 2019. "A Note On Trend Growth, Unemployment, And Optimal Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 23(4), pages 1703-1719, June.

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    More about this item

    Keywords

    growth; trend inflation; unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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