Nonlinear Unemployment Effects of the Inflation Tax

46 Pages Posted: 29 Nov 2021

See all articles by Stanislav Rabinovich

Stanislav Rabinovich

University of North Carolina (UNC) at Chapel Hill

Mohammed Ait Lahcen

Qatar University; University of Basel

Garth Baughman

Board of Governors of the Federal Reserve System

Hugo van Buggenum

Tilburg University

Multiple version iconThere are 4 versions of this paper

Abstract

We argue that long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks – productivity and monetary – and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the US postwar labor market and monetary data and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks.

Keywords: Money, search, Inflation, unemployment volatility, product-labor market interaction

Suggested Citation

Rabinovich, Stanislav and Ait Lahcen, Mohammed and Baughman, Garth and van Buggenum, Hugo, Nonlinear Unemployment Effects of the Inflation Tax. Available at SSRN: https://ssrn.com/abstract=3973673 or http://dx.doi.org/10.2139/ssrn.3973673

Stanislav Rabinovich (Contact Author)

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Mohammed Ait Lahcen

Qatar University ( email )

P.O. Box: 2713
Doha
Qatar

HOME PAGE: http://maitlahcen.github.io/

University of Basel ( email )

Petersplatz 1
Basel, Basel City CH-4003
Switzerland

HOME PAGE: http://maitlahcen.github.io/

Garth Baughman

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Hugo Van Buggenum

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

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