On the Long-Run Unemployment, Inflation, and Volatility

This paper revisits the relationship between unemployment and inflation in long-run through lens of a New-Keynesian model augmented with downward nominal wage rigidity (DNWR). It finds that when labor market is affected by DNWR, this goes beyond tradeoff first moments provided short-run Phillips curve. Higher volatility raises at low-frequency. Increased makes wages more volatile but constrains from falling. Unemployment therefore likely to increase above natural level guarantee equilibrium. The theoretical findings are robust different formalizations DNWR workers assumed as forward-looking DNWR. Panel regressions test positive co-movement using data OECD countries. sensitivity analysis confirms evidence for several controls regression specifications.