Monetary policy and unemployment: A conceptual review

In this article, Mikael Carlsson analyses the relationship between monetary policy, inflation and unemployment. He shows that this relationship is affected by the type of theoretical model used. In the long run, unemployment is affected by the regulatory frameworks and institutions that govern the labour market. According to the older academic literature, it is unemployment's deviation from a constant long-run rate that affects inflation. In a modern new-Keynesian model with rigid wages and prices this does not apply. Here inflation is affected by the gap between the observed rate of unemployment and the rate that would prevail if all prices and wages adjusted without frictions. This difference means that it is important to clarify the underlying conceptual framework that is being used when discussing the impact of monetary policy on inflation and unemployment.

The article is included in this year's third issue of the Sveriges Riksbank Economic Review, which was published on 17 October.