published in: European Journal of Political Economy, 2005, 21 (1), 1-32
This paper offers a reappraisal of the inflation-unemployment tradeoff, based on "frictional
growth" describing the interplay between nominal frictions and money growth. When the
money supply grows in the presence of price inertia (due to staggered wage contracts with
time discounting), the price adjustments to each successive change in the money supply are
never able to work themselves out fully. In this context, monetary shocks have a gradual and
delayed effect on inflation, and these shocks also generate plausible impulse-responses for
unemployment. Although our theory contains no money illusion, no permanent nominal
rigidities, and no departure from rational expectations, there is a long-run inflation-unemployment
tradeoff.
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