Inflation, Unemployment and Economic Growth in a Schumpeterian Economy

Chu, Angus C. and Cozzi, Guido and Furukawa, Yuichi (2013): Inflation, Unemployment and Economic Growth in a Schumpeterian Economy.

Abstract

This study explores the long-run relationship between inflation and unemployment in a monetary Schumpeterian growth model with matching frictions in the labor market and cash-in-advance (CIA) constraints on consumption and R&D investment. Under the CIA constraint on R&D, a higher inflation that raises the opportunity cost of cash holdings leads to a decrease in innovation and economic growth, which in turn decreases labor-market tightness and increases unemployment. Under the CIA constraint on consumption, a higher inflation instead decreases unemployment in addition to stifling innovation and economic growth. Therefore, the two CIA constraints have drastically different implications on the long-run relationship between inflation and unemployment. We also calibrate our model to aggregate data in the US and Eurozone to explore quantitative implications on the relationship between inflation and unemployment.

• Item Type: MPRA Paper
• Language: English
• Keywords: inflation; unemployment; innovation; economic growth.
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

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