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Christian-Albrechts-Universität zu Kiel

Institut für Volkswirtschaftslehre - Department of Economics
Economics Working Papers

Economics Working Papers: Abstract 2017-01


Nummer

2017-01

Autoren

Mewael F. Tesfaselassie, Maik H. Wolters

 

Titel

 

The Impact of Growth on Unemployment in a Low vs. a High Inflation Environment
Abstract The standard search model of unemployment predicts, under realistic assumptions about household preferences, that disembodied technological progress leads to higher steady-state unemployment. This prediction is at odds with the 1970s experience of slow productivity growth and high unemployment in industrial countries. We show that introducing nominal price rigidity helps in reconciling the model’s prediction with experience. Faster growth is shown to lead to lower unemployment when inflation is relatively high, as was the case in the 1970s. In general, the sign of the effect of growth on unemployment is shown to depend on the level of steady-state inflation. There is a threshold level of inflation below (above) which faster growth leads to higher (lower) unemployment. The prediction of the model is supported by an empirical analysis based on US and European data.

Keywords: Growth, trend inflation, unemployment

JEL classification: E24, E31

 

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