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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. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis.
  2. Cooley, Thomas F. & Quadrini, Vincenzo, 2004. "Optimal monetary policy in a Phillips-curve world," Journal of Economic Theory, Elsevier, vol. 118(2), pages 174-208, October.
  3. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  4. Aleksander Berentsen & Guido Menzio & Randall Wright, 2007. "Inflation and Unemployment: Lagos-Wright meets Mortensen-Pissarides," Kiel Working Papers 1334, Kiel Institute for the World Economy.
  5. 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) 2007013, Université catholique de Louvain, Département des Sciences Economiques.
  6. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
  7. Philippe Weil & Etienne Wasmer, 2004. "The macroeconomics of credit and labor market imperfections," ULB Institutional Repository 2013/13436, ULB -- Universite Libre de Bruxelles.
  8. Diamond, Peter A, 1984. "Money in Search Equilibrium," Econometrica, Econometric Society, vol. 52(1), pages 1-20, January.
  9. Etienne Lehmann, 2007. "A Search Model of Unemployment and Inflation”," Working Papers 2007-16, Centre de Recherche en Economie et Statistique.
  10. Shi, Shouyong, 1998. "Search for a Monetary Propagation Mechanism," Journal of Economic Theory, Elsevier, vol. 81(2), pages 314-352, August.
  11. Howitt, Peter, 1985. "Transaction Costs in the Theory of Unemployment," American Economic Review, American Economic Association, vol. 75(1), pages 88-100, March.
  12. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  13. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, 01.
  14. 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).
  15. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
  16. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2004. "Friedman meets Hosios: efficiency in search models of money," Working Paper 0408, Federal Reserve Bank of Cleveland.
  17. Wasmer, Etienne & Weil, Philippe, 2000. "The Macroeconomics of Labor and Credit Market Imperfections," IZA Discussion Papers 179, Institute for the Study of Labor (IZA).
  18. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October.
  19. 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, vol. 47(3), pages 701-722, 08.
  20. Diamond, Peter & Yellin, Joel, 1990. "Inventories and Money Holdings in a Search Economy," Econometrica, Econometric Society, vol. 58(4), pages 929-50, July.
  21. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  22. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
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Cited by:
  1. Pascal Michaillat & Emmanuel Saez, 2013. "A Model of Aggregate Demand and Unemployment," CEP Discussion Papers dp1235, Centre for Economic Performance, LSE.
  2. Lehmann, Etienne & Van Der Linden, Bruno, 2010. "Search Frictions On Product And Labor Markets: Money In The Matching Function," Macroeconomic Dynamics, Cambridge University Press, vol. 14(01), pages 56-92, February.
  3. Cardullo, Gabriele, 2011. "The distributive and welfare effects of product and labour market deregulation," Labour Economics, Elsevier, vol. 18(2), pages 205-217, April.
  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. repec:spo:wpecon:info:hdl:2441/5l6uh8ogmqildh09h481p4obg is not listed on IDEAS

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