A Long-Run Approach to Money, Unemployment, and Equity Prices
32 Pages Posted: 28 Jan 2022 Publication Status: Submitted
This study documents robust empirical evidence that a significant joint relationship between the long-term trends of inflation, unemployment, and equity prices exists in the post-WWII U.S. data: (i) a positive relationship between inflation and unemployment; (ii) a negative relationship between unemployment and equity prices; and (iii) a negative relationship between inflation and equity prices. Then, we provide a microfounded framework to account for the evidence. The calibration exercises show that the model results driven solely by US monetary policy can account for 62.9% and 29.8% of variations of the long-term trends of US unemployment rate and real equity prices, respectively.
Keywords: Inflation, Unemployment, Equity Prices, Search Models
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