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

• Authors: Yasuhito Tanaka

Abstracts

EN

We 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.

Keywords

EN

microeconomic foundation; monopolistic competition; negative real balance effect; Phillips curve; a three-period overlapping generations model

• Publisher: Uniwersytet Warszawski. Wydział Nauk Ekonomicznych
• Journal: Central European Economic Journal
• Year: 2021
• Volume: 8
• Issue: 55
• Pages: 163-175

Dates

published

2021

Contributors

author

Yasuhito Tanaka

• Department of Economics, Faculty of Economics Doshisha University Kyoto, Japan

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Identifiers

DOI

10.2478/ceej-2021-0010

Biblioteka Nauki

1964883