Long-run inflation-growth relationshipnominal rigidities, unemployment and financial frictions

Résumé

The issue tackled in this thesis is the long-run relationship inflation/growth in neo-Keynesian DSGE models with endogenous growth, considering the coherence of the inflation targets of the central banks. The results obtained are related to the type of wage considered, the existence of frictions in labor and credit markets and the empirical implications for six advanced countries. They can be summarized in the following four points:  The consideration of the wage per unit of labor (per worker or per hour) is the reason for obtaining negative optimal trend inflation, while that inflation is zero with wage per unit of human capital. Both results come from a dynamic mechanism that reaches a situation which is equivalent to wage flexibility.  The same results on optimal inflation are confirmed once unemployment is introduced in the models and it is found an extension of the Friedman critique to the de Phillips curve in the long run which generalizes the usual version of the mainstream macroeconomic models. The extension maintains the inflation/unemployment independence (natural rate), adding a protagonist role of employment and labor force participation rates, that are maximal for the optimal inflation rate. The inflation rate value that coincides with the natural unemployment rate is not indifferent, as in Friedman’s critique, because it can be accompanied by different growth, employment and labor force participation rates.  The frictions of the financial sector confirm the same results on the optimal trend inflation and not always have a negative impact on the achievable economic growth because it depends on the type of friction. Finally, the empirical application explores in what extent the six considered countries could improve their growth, employment and labor force participation rates according to the obtained inflation/growth relationship in every case. The growth gain, after adjusting their inflation targets, would come for the USA, Australia and Spain from an increase of the employment and labor force participation rates, while in the case of Japan, France y Germany it would come from a productivity increase.