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ABSTRACT:
When labor is indivisible, there exist efficient outcomes with some agents randomly unemployed (Rogerson 1988). We integrate this idea into the modern theory of monetary exchange, where some trade occurs in centralized markets and some in decentralized markets (as in Lagos and Wright 2006). This delivers a general equilibrium model of unemployment and money, with explicit microeconomic foundations. We show the implied relation between inflation and unemployment can be positive or negative, depending on simple preference conditions. Our Phillips Curve provides a long-run, exploitable, trade off for monetary policy; it turns out, however, that the optimal policy is the Freidman rule.

SUGGESTED CITATION:
Guillaume Rocheteau, Peter Rupert, and Randall Wright, "Inflation and Unemployment in General Equilibrium" (August 1, 2007). Department of Economics, UCSB. Departmental Working Papers. Paper 07-07.
http://repositories.cdlib.org/ucsbecon/dwp/07-07