An evaluation of the inflationary pressure associated with short- and long-term unemployment

- Analysis of the effect of short- and long-tern unemployment on inflation has proven difficult because the series are highly correlated.
- Use of regional variation can discriminate the separate effects of short- and long-term unemployment on inflation.
- This is demonstrated using a simple model and Monte Carlo exercises.
- Applying the ideas to US data suggests that short- and long-term unemployment exert equal downward pressure on price inflation in the United States.

The role of long-term unemployment in inflationary pressures has been examined in academic studies and discussed by policymakers. I demonstrate econometric weaknesses in previous studies, propose a solution based on regional variation, and present new evidence.