Working Paper: CEPR ID: DP4102
Authors: Marika Karanassou; Hector Sala; Dennis Snower
Abstract: This paper has two aims. First, it provides simple theoretical models that highlight two channels whereby monetary shocks have permanent real effects and the interactions between these channels. Second, it presents an empirical dynamic model, covering a panel of EU countries, and derives the implied long-run inflation-unemployment tradeoff. Our results suggest that the tradeoff is far fromvertical. We also find that wage persistence plays a larger role than price persistence in generating the tradeoff, but that the two forms of persistence are complementary in giving monetary policy its long-run real effects. Our results call for a reassessment of the European macroeconomic experience.
Keywords: business cycles; forward-looking expectations; homogeneous dynamic panels; inflation; monetary policy; nominal inertia; panel unit root tests; Phillips curve; unemployment
JEL Codes: E2; E3; E4; E5; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money growth (O42) | unemployment (J64) |
| money growth (O42) | inflation (E31) |
| money growth (O42) | NAIRU (E24) |
| wage persistence (J31) | unemployment (J64) |
| price persistence (D40) | unemployment (J64) |
| money growth (O42) | real economic activity (E39) |
| lagged adjustments of nominal variables (E19) | unemployment (J64) |
| monetary policy (E52) | unemployment (J64) |