Inflation and Unemployment in the Long Run Revisited

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ID: 319527
2026
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Abstract
Abstract We construct a continuous-time, monetary model with frictional goods and labour markets to revisit the long-run relationship between inflation and unemployment. By endogenising the value of consumers’ outside options and market power in accordance with standard consumer search theory, we generate novel predictions for the slope of the long-run Phillips curve, optimal monetary policy, and outcomes at the frictionless limit. The relationship between inflation and unemployment is non-monotone and, at low inflation rates, an increase in inflation reduces unemployment. The Friedman rule is suboptimal when firms’ average bargaining power across markets is low. Markups and markdowns vanish as frictions disappear.
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openalex_W7167220038 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Zachary Bethune, Michael Choi, Sébastien Lotz, Guillaume Rocheteau
Journal the economic journal
Year 2026
DOI
10.1093/ej/ueag089
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