Combining the Beveridge and the Phillips Curve into an Integrative Model: The Modified Output Gap
Journal Title: Review of Economics & Finance - Year 2016, Vol 6, Issue 2
Abstract
We present a new theoretical concept: modified output gap (MOG), based on the Phillips and on the Beveridge curve. Both of these pillars are derived analytically and combined with each other, revealing the explicit positive relationship between the vacancy ratio and the inflation rate. It is shown how a deterioration in the matching process on the labor market leads to shifts in both curves, but also in the MOG. This indicates that a loss in the efficiency of matching in the labor market, when combined with an increase of the demand in the markets for goods will push up inflation. As a result, a sort of second “policy ineffectiveness lemma” emerges: at high levels of mismatch, expansive measures of monetary and/or fiscal policies will lead to higher inflation in the first place with little (positive) repercussions on the real side of the economy.
Authors and Affiliations
Friedrich L. Sell
Keywords
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- EP ID EP259350
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