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Microeconomic Foundation for Phillips Curve with a Three-Period Overlapping Generations Model and Negative Real Balance Effect

Microeconomic Foundation for Phillips Curve with a Three-Period Overlapping Generations Model and... AbstractWe show a negative relation between the inflation rate and the unemployment rate, that is, the Phillips curve using a three-period overlapping generations (OLG) model with childhood period and pay-as-you-go pension for older generation under monopolistic competition with negative real balance effect. In a three-period OLG model, there may exist a negative real balance effect because consumers have debts and savings. A fall (or rise) in the nominal wage rate induces a fall (or rise) in the price, then by negative real balance effect, the unemployment rate rises (or falls), and we get a negative relation between the inflation rate and the unemployment rate. This conclusion is based on the premise of utility maximisation of consumers and profit maximisation of firms. Therefore, we present a microeconomic foundation for the Phillips curve. We also examine the effects of fiscal policy financed by seigniorage, which is represented by left-ward shift of the Phillips curve. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Central European Economic Journal de Gruyter

Microeconomic Foundation for Phillips Curve with a Three-Period Overlapping Generations Model and Negative Real Balance Effect

Tanaka, Yasuhito
Central European Economic Journal , Volume 8 (55): 13 – Jan 1, 2021
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Publisher
de Gruyter
Copyright
© 2021 Yasuhito Tanaka, published by Sciendo
eISSN
2543-6821
DOI
10.2478/ceej-2021-0010
Publisher site
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Abstract

AbstractWe show a negative relation between the inflation rate and the unemployment rate, that is, the Phillips curve using a three-period overlapping generations (OLG) model with childhood period and pay-as-you-go pension for older generation under monopolistic competition with negative real balance effect. In a three-period OLG model, there may exist a negative real balance effect because consumers have debts and savings. A fall (or rise) in the nominal wage rate induces a fall (or rise) in the price, then by negative real balance effect, the unemployment rate rises (or falls), and we get a negative relation between the inflation rate and the unemployment rate. This conclusion is based on the premise of utility maximisation of consumers and profit maximisation of firms. Therefore, we present a microeconomic foundation for the Phillips curve. We also examine the effects of fiscal policy financed by seigniorage, which is represented by left-ward shift of the Phillips curve.

Journal

Central European Economic Journal – de Gruyter

Published: Jan 1, 2021

Keywords: microeconomic foundation; monopolistic competition; negative real balance effect; Phillips curve; a three-period overlapping generations model; E12; E24; E31

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