The paper examines the theoretical literature of the past decade on the causes of inflation and unemployment. The basic theme is the pervasive impact of sluggish price adjustment on the validity and relevance of recent models. The insulation of real output from anticipated monetary changes, derived in the recent rational expectations literature, loses its validity when prices adjust slowly to changes in demand. The search literature explains only part of unemployment when layoffs rather than wage cuts are the major tool of employment adjustment in recessions. The 'new-new' microeconomics of implicit contracts, idiosyncratic exchange, and default penalties is reviewed, as are the implications of sluggish price adjustment for both 'domestic monetarism' and for the monetary approach to balance-of-payments theory.
ASJC Scopus subject areas
- Economics and Econometrics