Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/3856
Year of Publication: 
2006
Series/Report no.: 
IZA Discussion Papers No. 2265
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
The conventional wisdom that inflation and unemployment are unrelated in the long-run implies that these phenomena can be analysed by separate branches of economics. The macro literature tries to explain inflation dynamics and estimates the NAIRU. The labour macro literature tries to explain unemployment dynamics and determine the real economic factors that drive the natural rate of unemployment. We show that the orthodox view that the New Keynesian Phillips curve is vertical in the long-run and that it cannot generate substantial inflation persistence relies on the implausible assumption of a zero interest rate. In the light of these results, we argue that a holistic framework is needed to jointly explain the evolution of inflation and unemployment.
Subjects: 
NAIRU
New Keynesian Phillips Curve
Inflation-unemployment tradeoff
Inflation dynamics
Unemployment dynamics
Natural rate of unemployment
JEL: 
E24
E31
Document Type: 
Working Paper

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