ASSESSING THE MONETARY NATURE OF INFLATION AND UNEMPLOYMENT: A THEORETICAL AND EMPIRICAL REVIEW
Keywords:
Inflation, Unemployment, Monetary Policy, Quantity Theory.Abstract
This paper analyses key theoretical and empirical debates that seek to clarify the scope to which inflation and unemployment can be treated as monetary phenomena. They continue to be of central concern in macroeconomic discourse, as scholars argued what induces these two important complications for the economy, given that monetary explanations have always been common and remain to be of great consideration to the economic policy makers. This study integrates the empirical evidence which accompanies the various strands of economic thought, as well as those traditionally considered classic and monetarist, also, with New Keynesian and Rational Expectations models, in order to explain the ways monetary impacts, interact with the real economy. It is true that monetary factors elucidate inflation and have a significant, often dominant role, specifically in the long run. Their relation with unemployment, though, is more intricate, as theory and evidence propose a short run trade-off but limited long run effect, mostly under rational expectations. The results reinforce the central bank's dominating actions to attain price stability, nevertheless also demonstrate the severe bounds of what can be done with monetary policy to reduce unemployment and highlight the natural rate of unemployment feature.
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