Working Paper

Phillips curves, monetary policy, and a labor market transmission mechanism

Abstract: This paper develops a general equilibrium monetary model with performance incentives to study the inflation-unemployment relationship. A long-run downward-sloping Phillips curve can exist with perfectly anticipated inflation because workers? incentive to exert effort depend on financial market returns. Consequently, higher inflation rates can reduce wages and stimulate employment. An upward-sloping or vertical Phillips Curve can arise instead, depending on agents? risk aversion and the possibility of capital formation. Welfare might be higher away from the Friedman rule and with a central bank putting some weight on employment.

Keywords: Phillips curve; Labor market; Monetary policy; Wages;

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2007

Number: RWP 07-12