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The Business Cycle With Nominal Contracts And Search Frictions

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  • Moon, Weh-Sol

Abstract

Macroeconomic models of the economy with rigid wage structures tend to predict unrealistically volatile labor hours and countercyclical productivity. This study extends the Cho–Cooley model by incorporating labor market frictions and efficient bargaining as an alternative contracting scheme in which contracts are forward-looking and specify labor hours and wage rates. By accounting for search frictions and realistic contractual schemes, the extended model overcomes two counterfactual predictions: (1) excess volatility of employment and output and (2) countercyclical productivity. However, the extended model fails to produce the Beveridge curve.

Suggested Citation

  • Moon, Weh-Sol, 2018. "The Business Cycle With Nominal Contracts And Search Frictions," Macroeconomic Dynamics, Cambridge University Press, vol. 22(2), pages 307-330, March.
    • Handle: RePEc:cup:macdyn:v:22:y:2018:i:02:p:307-330_00
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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