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Phillips Curves, Monetary Policy, and a Labor Market Transmission Mechanism By Robert R. Reed and
Stacey L. Schreft |
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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.
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