A New-Monetarist Phillips Curve

Abstract

A model with labor search, limited recordkeeping and market segmentation is provided to explain the correlations between inflation and real variables in the short run, and in the long run. A one-time money injection causes intensive-margin effects on employment, and reduces the unemployment rate in the short run. There are persistent liquidity effects on real variables, inflation and the nominal interest rate, as a result of search frictions in the labor market. Money injections in the long run raise the unemployment rate. The optimal monetary policy minimizes the distortion from labor-search frictions, and eliminates the intertemporal monetary distortion and the market segmentation friction.

Keywords: Liquidity, Labor-market Search, Unemployment, Market Segmentation, Persistent Liquidity Effect, Persistent Inflation, Liquidity Trap, Optimal Monetary Policy, New Monetarism