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Search in the product market and the real business cycle

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  • Mathä, Thomas Y.
  • Pierrard, Olivier

Abstract

We develop a search-matching model, where firms search for customers (e.g. in form of advertising). Firms use long-term contracts and bargain over prices, resulting in a price mark up above marginal cost, which is pro- cyclical and depends on firms’ relative bargaining power. Product market frictions decrease the steady state equilibrium, improve the cyclical properties of the model and provide a more realistic picture of firms’ business environment. This suggests that product market frictions may well be crucial in explaining business cycle fluctuations. Finally, we also show that welfare costs of price rigidities are negligible relative to welfare costs of frictions. JEL Classification: E10, E31, E32

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1036.

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Date of creation: Mar 2009
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Handle: RePEc:ecb:ecbwps:20091036

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Keywords: business cycle; Frictions; Price bargain; product market;

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Cited by:
  1. Emmanuel Saez & Pascal Michaillat, 2013. "A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters," 2013 Meeting Papers 1216, Society for Economic Dynamics.
  2. Laurent Maurin & Moreno Roma & Igor Vetlov, 2011. "Profit Dynamics across the Largest Euro Area countries and Sectors," Bank of Lithuania Working Paper Series 12, Bank of Lithuania.
  3. Mirko Abbritti, 2012. "Product Market Frictions, Bargaining and Pass-Through," Faculty Working Papers 19/12, School of Economics and Business Administration, University of Navarra.
  4. Dennis Wesselbaum, 2010. "Price Bargaining, the Persistence Puzzle, and Monetary Policy," Kiel Working Papers 1629, Kiel Institute for the World Economy.
  5. Sanjay K. Chugh & David M. Arseneau, 2008. "Optimal Fiscal and Monetary Policy in Customer Markets," 2008 Meeting Papers 101, Society for Economic Dynamics.

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