Nonlinear Unemployment Effects of the Inflation Tax

We argue that long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks – productivity and monetary – and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the U.S. postwar labor market and monetary data, and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks.

Contrasting temporal difference and opportunity cost reinforcement learning in an empirical money-emergence paradigm

Money is a fundamental and ubiquitous institution in modern economies. However, the question of its emergence remains a central one for economists. The monetary search-theoretic approach studies the conditions under which commodity money emerges as a solution to override frictions inherent to interindividual exchanges in a decentralized economy. Although among these conditions, agents’ rationality is classically essential and a prerequisite to any theoretical monetary equilibrium, human subjects often fail to adopt optimal strategies in tasks implementing a search-theoretic paradigm when these strategies are speculative, i.e., involve the use of a costly medium of exchange to increase the probability of subsequent and successful trades. In the present work, we hypothesize that implementing such speculative behaviors relies on reinforcement learning instead of lifetime utility calculations, as supposed by classical economic theory. To test this hypothesis, we operationalized the Kiyotaki and Wright paradigm of money emergence in a multistep exchange task and fitted behavioral data regarding human subjects performing this task with two reinforcement learning models. Each of them implements a distinct cognitive hypothesis regarding the weight of future or counterfactual rewards in current decisions. We found that both models outperformed theoretical predictions about subjects’ behaviors regarding the implementation of speculative strategies and that the latter relies on the degree of the opportunity costs consideration in the learning process. Speculating about the marketability advantage of money thus seems to depend on mental simulations of counterfactual events that agents are performing in exchange situations.

INFLATION AND REAL WAGE DISPERSION: A MODEL OF FRICTIONAL MARKETS

Current Population Survey (CPS) data over the period from 1994 to 2008 show that inflation has a positive effect on the residual wage dispersion. To explain this phenomenon, we introduce uncoordinated job searches into a general equilibrium monetary search framework. Our model shows that the uncoordinated job searches by unemployed workers give rise to an equilibrium, where a firm is matched with zero, one, or multiple job applicants. The ex post difference in matching probabilities generates a two-point wage dispersion among identical workers, when the Mortensen rule is implemented in the wage-determination process. In our model, inflation positively influences the wage dispersion directly through its impact on firm's real profit and indirectly through the effect of inflation that spills over from the goods market to the labor market. With reasonable parameter values, the calibrated model can account for most of the observed responses of residual wage dispersion to inflation.

Currency Exchange in an Open-Economy Random Search Model

This paper studies how endogenous currency exchange arises in a two-country, two-currency monetary search model. Although currency exchange is widely observed in the globalized economy, Zhou (1997) is one of the exceptional studies that adopted a search model to generate currency exchange endogenously. Moreover, in her model, currency exchange occurs only in the case where agents rarely consume foreign goods, which is contrary to the well-known fact that international trade increases the number of currency exchanges. We construct a monetary search model that has a feature that increased international trade increases the volume of currency exchange. We develop a two-country model in which each country has two types of agents: local traders who consume only the goods produced in the home country, and international traders who consume only the goods produced in the foreign country. For international traders, the foreign currency gives more opportunity to obtain the foreign goods than the home currency does. Thus, when an international trader holds the home currency, he has an incentive to exchange the home currency for the foreign currency. Unlike Zhou, the model has a feature that currency exchange is more likely to occur when many agents are engaged in international trade.