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The role of search frictions in the long-run relationships between inflation, unemployment and capital

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  • Gomis-Porqueras, Pedro
  • Huangfu, Stella
  • Sun, Hongfei

Abstract

This paper explores the long-run relationships between inflation, unemployment and capital accumulation by proposing a model with search frictions in both goods and labor markets. This framework allows us to identify a negative extensive margin effect of inflation on the number of firms demanding capital and a positive intensive margin effect of inflation on the capital demanded per firm. The two effects together generate a hump-shaped relationship between long-run inflation and aggregate capital. These results are consistent with our empirical evidence from a cross-section of 76 countries, which suggests a non-monotonic relationship between inflation and investment to GDP ratio in the long run. Our calibrated results are also consistent with empirical findings from the U.S. data on the effect of inflation on capital stock, unemployment and the real interest rates.

Suggested Citation

  • Gomis-Porqueras, Pedro & Huangfu, Stella & Sun, Hongfei, 2020. "The role of search frictions in the long-run relationships between inflation, unemployment and capital," European Economic Review, Elsevier, vol. 123(C).
    • Handle: RePEc:eee:eecrev:v:123:y:2020:i:c:s0014292120300283
    DOI: 10.1016/j.euroecorev.2020.103396
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    More about this item

    Keywords

    Monetary policy; Inflation; Unemployment; Capital; Search frictions;
    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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