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We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first discuss data, documenting astrong positive relation between the variables at low frequencies. We then develop a framework where both money and unemployment are modeled using explicit microfoundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets. We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior.  The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment. For conservative parameterizations, money accounts for some but not that much of trend unemployment — by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone. For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century. Download Paper
We introduce lotteries - that is, randomized trading - into search-theoretic models of monetary exchange. In the model with indivisible goods and fiat money, we show that in any monetary equilibrium goods change hands with probability 1 and money changes hands with probability 7 where 7 < 1 iff the buyer has sufficient bargaining power. In the model with divisible goods, a nonrandom quantity of goods q changes hands with probability 1 and, again, money changes hands with probability 7 where 7 < 1 iff the buyer has sufficient bargaining power. Hence, the implicit assumption made in the previous literature that lotteries are ruled out is restrictive. Moreover , q may be less than but can never exceed the efficient quantity ( a result that cannot be shown without lotteries). We also consider the implications of lotteries for models with direct barter or commodity money. If commodity money has sufficient intrinsic value, we show the equilibrium quantity q is necessarily efficient ( another result that cannot be shown without lotteries). Download Paper