Clashing Theories: Why Is Unemployment So High When Interest Rates Fall to Zero?

General-equilibrium models for studying the zero lower bound on the nominal interest rate contain implicit theories of unemployment. In some cases, the theory is explicit. When the nominal rate is above the level that clears the current market for output, the excess supply shows up as diminished output, lower employment, and higher unemployment. Quite separately, the Diamond-Mortensen-Pissarides model is a widely accepted and well-developed account of turnover, wage determination, and unemployment. The standard DMP model is a clashing theory of unemployment, in the sense that its determinants of unemployment do not include any variables that signal an excess supply of current output. Altering the DMP model by allowing the rate of ination to inuence