Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 150: Is There a Long-Run Trade-Off between Inflation and Unemployment?

Bo Axell and Harald Lang
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Bo Axell: Research Institute of Industrial Economics (IFN)
Harald Lang: Research Institute of Industrial Economics (IFN)

Abstract: How are inflation and unemployment related in the long run? Are they negatively correlated, as in the so-called naive Phillips curve theories or uncorrelated, "as in the neo-liberals' view or are they positively correlated as Friedman suggested in his Nobel lecture? In this paper inflation is introduced into a general equilibrium search unemployment model. We show that it is possible to get either a negatively or a positively sloping long-run Phillips curve, all depending on the source of inflation.

Keywords: Unemployment; inflation; Phillips curve; general equilibrium

JEL-codes: D50; E31; J64

28 pages, December 1985

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