ABSTRACT
Having argued in chapter 3 that the existence of long-run high rates of unemployment can be largely explained by insufficient AD, chapter 8 develops a framework to explain the rising inflation costs over time of any unemployment goal. What is to be proposed is a useful way of modeling not only the higher costs of FE in the 1980s and the 1990s but also the inflation of the late 1960s and early 1970s, the acceleration of inflation rates following the second oil shock, and the high unemployment-high inflation between these periods. In addition, the model gives insights into likely future developments, as current unemployment policies are linked to institutional changes which have long-lasting implications. At the center of the analysis is a variable-coefficient model of inflation combined with hysteresis effects and certain institutional influences.
