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Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies

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  • di Pace, Federico

    ()
    (Department of Economics, Mathematics and Statistics, Birkbeck, University of London)

  • Faccini, Renato

    ()
    (Bank of England)

Abstract

We extend the standard textbook search and matching model by introducing deep habits in consumption. The cyclical fluctuations of vacancies and unemployment in our model can replicate those observed in the US data, with labour market tightness being 20 times more volatile than consumption. Vacancies display a hump-shaped response to technology shocks as well as autocorrelation coefficients that are in line with the empirical evidence. Our model preserves the assumption of fully flexible wages for the new hires and the calibration is consistent with the estimated elasticity of unemployment to unemployment benefits. The numerical simulations generate an artificial Beveridge curve which is in line with the data.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 391.

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Length: 26 pages
Date of creation: 03 Jun 2010
Date of revision:
Handle: RePEc:boe:boeewp:0391

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Keywords: Consumption; business cycles; labour market fluctuations; search and matching; wage bargaining;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies
    by Christian Zimmermann in NEP-DGE blog on 2010-06-15 07:56:22
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Cited by:
  1. Giovanni Melina & Stefania Villa, 2013. "Fiscal Policy and Lending Relationships," IMF Working Papers 13/141, International Monetary Fund.
  2. Francesco Zanetti & Konstantinos Theodoridis, 2014. "News and Labor Market Dynamics in the Data and in Matching Models," Economics Series Working Papers 699, University of Oxford, Department of Economics.
  3. Matthias Gubler & Matthias S. Hertweck, 2013. "Commodity Price Shocks and the Business Cycle: Structural Evidence for the U.S," Working Papers 2013-05, Swiss National Bank.
  4. Cristiano Cantore & Paul Levine & Giovanni Melina, 2013. "A Fiscal Stimulus and Jobless Recovery," IMF Working Papers 13/17, International Monetary Fund.
  5. Abbritti, Mirko & Fahr, Stephan, 2011. "Macroeconomic implications of downward wage rigidities," Working Paper Series 1321, European Central Bank.

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