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Phillips curves, monetary policy, and a labor market transmission mechanism

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  • Robert R. Reed
  • Stacey L. Schreft

Abstract

This paper develops a general equilibrium monetary model with performance incentives to study the inflation-unemployment relationship. A long-run downward-sloping Phillips curve can exist with perfectly anticipated inflation because workers? incentive to exert effort depend on financial market returns. Consequently, higher inflation rates can reduce wages and stimulate employment. An upward-sloping or vertical Phillips Curve can arise instead, depending on agents? risk aversion and the possibility of capital formation. Welfare might be higher away from the Friedman rule and with a central bank putting some weight on employment.

Suggested Citation

  • Robert R. Reed & Stacey L. Schreft, 2007. "Phillips curves, monetary policy, and a labor market transmission mechanism," Research Working Paper RWP 07-12, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp07-12
    as

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    File URL: https://www.kansascityfed.org/documents/5335/pdf-rwp07-12.pdf
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    References listed on IDEAS

    as
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    4. George A. Slotsve & James M. Nason, 2003. "Along the New Keynesian Phillips Curve with Nominal and Real Rigidities," Computing in Economics and Finance 2003 270, Society for Computational Economics.
    5. Stacey L. Schreft & Bruce D. Smith, 1998. "The Effects of Open Market Operations in a Model of Intermediation and Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(3), pages 519-550.
    6. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    7. Campbell, Carl M, III, 1993. "Do Firms Pay Efficiency Wages? Evidence with Data at the Firm Level," Journal of Labor Economics, University of Chicago Press, vol. 11(3), pages 442-470, July.
    8. Pierre‐André Chiappori & Monica Paiella, 2011. "Relative Risk Aversion Is Constant: Evidence From Panel Data," Journal of the European Economic Association, European Economic Association, vol. 9(6), pages 1021-1052, December.
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    Full references (including those not matched with items on IDEAS)

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    Keywords

    Phillips curve; Labor market; Monetary policy; Wages;
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