Inflation volatility and unemployment in industrial countries

Abstract

Using annual data on 20 industrial countries over the period from 1972 to 2003, this article analyses the impact of inflation volatility on unemployment. It finds that higher volatility over the previous 10 years is associated with a higher unemployment rate in the current year. The effect appears to be small in the short run and medium sized in the long run. The results are robust to variations in specification and sample size. The magnitude of the effect is not smaller if the sample is limited to the more recent sub-period of comparatively low inflation volatility.

Notes

¹ All data used in this article are in annual frequency.

² To lessen concerns about possible simultaneity bias, we do not include the current year in the first 5-year interval.

³ Acemoglu and Shimer (2000) and Chetty (2008), among others, argue that generous unemployment benefits allow workers to find better matches. They do not, however, argue that this leads to lower unemployment.

⁴ These figures are based on the coefficients on both of our inflation volatility variables. To calculate the long-run effect, we additionally take the coefficient on the lagged unemployment rate into account.