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Search Frictions on Product and Labor Markets: Money in the Matching Function

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Author Info

  • Lehmann, Etienne

    ()
    (CRED, Université Panthéon Assas Paris 2)

  • Van der Linden, Bruno

    ()
    (IRES, Université catholique de Louvain)

Abstract

This paper builds a macroeconomic model of equilibrium unemployment in which firms persistently face difficulties in selling their production and this affects their decisions to create jobs. Due to search-frictions on the product market, equilibrium unemployment is a U-shaped function of the ratio of total demand to total supply on this market. When prices are at their Competitive Search Equilibrium values, the unemployment rate is minimized. Yet, the Competitive Search Equilibrium is not efficient. Inflation is detrimental to unemployment.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2718.

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Length: 40 pages
Date of creation: Mar 2007
Date of revision:
Publication status: published in: Macroeconomic Dynamics, 2010, 10(1), 56-92
Handle: RePEc:iza:izadps:dp2718

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Keywords: equilibrium unemployment; inflation; matching; demand constraints;

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References

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  1. Lehmann E., 2006. "A Search Model of Unemployment and Inflation," Working Papers ERMES, ERMES, University Paris 2 0605, ERMES, University Paris 2.
  2. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum, Oslo University, Department of Economics 37/1995, Oslo University, Department of Economics.
  3. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627 Elsevier.
  4. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  5. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  6. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, Econometric Society, vol. 65(1), pages 75-102, January.
  7. Diamond, Peter & Yellin, Joel, 1990. "Inventories and Money Holdings in a Search Economy," Econometrica, Econometric Society, Econometric Society, vol. 58(4), pages 929-50, July.
  8. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(2), pages 232-251, August.
  9. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2004. "Friedman meets Hosios: efficiency in search models of money," Working Paper 0408, Federal Reserve Bank of Cleveland.
  10. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(2), pages 165-193, October.
  11. Cooley, Thomas F. & Quadrini, Vincenzo, 2004. "Optimal monetary policy in a Phillips-curve world," Journal of Economic Theory, Elsevier, Elsevier, vol. 118(2), pages 174-208, October.
  12. Etienne, LEHMANN & Bruno, VAN DER LINDEN, 2007. "Search Frictions on Product and Labor markets : Money in the Matching Function," Discussion Papers (ECON - Département des Sciences Economiques), Université catholique de Louvain, Département des Sciences Economiques 2007013, Université catholique de Louvain, Département des Sciences Economiques.
  13. Etienne Wasmer & Philippe Weil, 2004. "The Macroeconomics of Labor and Credit Market Imperfections," American Economic Review, American Economic Association, American Economic Association, vol. 94(4), pages 944-963, September.
  14. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, American Economic Association, vol. 83(1), pages 63-77, March.
  15. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
  17. Randall Wright & Guido Menzio & Aleksander Berentsen, 2007. "Inflation and unemployment: Lagos-Wright meets Mortensen-Pissarides," 2007 Meeting Papers, Society for Economic Dynamics 237, Society for Economic Dynamics.
  18. Shi Shouyong, 1997. "Search for a Monetary Propagation Mechanism," Working Papers, Queen's University, Department of Economics 966, Queen's University, Department of Economics.
  19. Philippe Weil & Etienne Wasmer, 2004. "The macroeconomics of credit and labor market imperfections," ULB Institutional Repository 2013/13436, ULB -- Universite Libre de Bruxelles.
  20. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  21. P. A. Diamond, 1982. "Money in Search Equilibrium," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 297, Massachusetts Institute of Technology (MIT), Department of Economics.
  22. Howitt, Peter, 1985. "Transaction Costs in the Theory of Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 75(1), pages 88-100, March.
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Cited by:
  1. repec:spo:wpecon:info:hdl:2441/5l6uh8ogmqildh09h481p4obg is not listed on IDEAS
  2. Etienne, LEHMANN & Bruno, VAN DER LINDEN, 2007. "Search Frictions on Product and Labor markets : Money in the Matching Function," Discussion Papers (ECON - Département des Sciences Economiques), Université catholique de Louvain, Département des Sciences Economiques 2007013, Université catholique de Louvain, Département des Sciences Economiques.
  3. Pascal Michaillat & Emmanuel Saez, 2014. "Aggregate Demand, Idle Time, and Unemployment," Upjohn Working Papers and Journal Articles, W.E. Upjohn Institute for Employment Research 14-214, W.E. Upjohn Institute for Employment Research.
  4. Wasmer, Etienne, 2011. "A Steady-State Model of a Non-Walrasian Economy with Three Imperfect Markets," IZA Discussion Papers 5758, Institute for the Study of Labor (IZA).
  5. Cardullo, Gabriele, 2011. "The distributive and welfare effects of product and labour market deregulation," Labour Economics, Elsevier, Elsevier, vol. 18(2), pages 205-217, April.
  6. Pascal Michaillat & Emmanuel Saez, 2013. "A model of aggregate demand and unemployment," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 51579, London School of Economics and Political Science, LSE Library.

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