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A long-run approach to money, unemployment, and equity prices

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  • Jung, Kuk Mo
  • Pyun, Ju Hyun

Abstract

We propose a search and matching model that can account for a long-run joint relationship between inflation, unemployment, and equity prices. The model predicts the following long-run joint relationship: (i) a positive relationship between inflation and unemployment; (ii) a negative relationship between unemployment and equity prices; and (iii) a negative relationship between inflation and equity prices. Empirical evidence for this trivariate relationship in the post-WWII US data has been documented in previous studies. We reconfirm this evidence with expanded dataset. Furthermore, our calibration exercises show that the model results driven solely by US monetary policy can account for 62.9% and 29.8% of variations of the long-term trends of US unemployment rate and real equity prices, respectively.

Suggested Citation

  • Jung, Kuk Mo & Pyun, Ju Hyun, 2023. "A long-run approach to money, unemployment, and equity prices," Economic Modelling, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:ecmode:v:125:y:2023:i:c:s0264999323001499
    DOI: 10.1016/j.econmod.2023.106337
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    More about this item

    Keywords

    Inflation; Unemployment; Equity prices; Search models;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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