<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>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.</p>
</abstract>

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.

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

Department of Economics, Faculty of Economics

Central European Economic Journal

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

We show a negative relation between the inflation rate and the unemployment rate, that is, the Phillips curve using a three-period overlapping generations...

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

Published Online: Jul 26, 2021

Page range: 163 - 175

DOI: https://doi.org/10.2478/ceej-2021-0010

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

© 2021 Yasuhito Tanaka, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Fig. 1

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

Published Online: Jul 26, 2021

Page range: 163 - 175

DOI: https://doi.org/10.2478/ceej-2021-0010

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

© 2021 Yasuhito Tanaka, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Fig. 1

Fig. 2

Fig. 3

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