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A steady-state model of a non-walrasian economy with three imperfect markets

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  • Etienne Wasmer

    (Département d'économie)

Abstract

Unemployment may depend on equilibrium in other markets than the labor markets. This paper adresses this old idea by introducing search frictions on several markets: in a model of credit and labor market imperfections as in Wasmer and Weil (2004), I further introduce search on the goods market. The model can be solved by blocks: on two of the three markets, the relevant "market tightness" is a constant of parameters. In particular, goods market tightness, expressed as the ratio of unmatched consumers to unmatched firms, is equal to 1 which corresponds to a stochastic Say’s law: demand and supply are stochastically in equilibrium. Financial market tightness is also a function of three parameters related to financial frictions. Job creation and employment depend on the equilibrium in the other markets. Reciprocally, higher job destruction implies more volatility of income of individual consumers and higher destruction of consumption matches. This lowers profits and further reduces job creation. Finally, there are complementarities between frictions in each market: in particular, the marginal effect of financial frictions on equilibrium unemployment is amplified by goods market frictions and vice versa.

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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/5l6uh8ogmqildh09h481p4obg.

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Date of creation: May 2011
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Handle: RePEc:spo:wpmain:info:hdl:2441/5l6uh8ogmqildh09h481p4obg

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  1. Aleksander Berentsen & Guido Menzio & Randall Wright, 2009. "Inflation and unemployment in the long run," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 442, Institute for Empirical Research in Economics - University of Zurich.
  2. Etienne Wasmer & Philippe Weil, 2004. "The Macroeconomics of Credit and Labor Markets Imperfections," Sciences Po publications info:hdl:2441/8622, Sciences Po.
  3. Nicolas Petrosky-Nadeau & Etienne Wasmer, 2014. "Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions," Sciences Po Economics Discussion Papers 2014-09, Sciences Po Departement of Economics.
  4. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2010. "The Cyclical Volatility of Labor Markets under Frictional Financial Markets," IZA Discussion Papers 5131, Institute for the Study of Labor (IZA).
  5. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(2), pages 390-431, June.
  6. Lehmann, Etienne & Van der Linden, Bruno, 2007. "Search Frictions on Product and Labor Markets: Money in the Matching Function," IZA Discussion Papers 2718, Institute for the Study of Labor (IZA).
  7. Ricardo Lagos, 2000. "An Alternative Approach to Search Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(5), pages 851-873, October.
  8. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers, Society for Economic Dynamics 460, Society for Economic Dynamics.
  9. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195102680, October.
  10. Benassy, Jean-Pascal, 1993. "Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 31(2), pages 732-61, June.
  11. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 972-90, October.
  12. Etienne Wasmer, 2006. "General versus Specific Skills in Labor Markets with Search Frictions and Firing Costs," American Economic Review, American Economic Association, American Economic Association, vol. 96(3), pages 811-831, June.
  13. Etienne Wasmer & Nicolas Petrosky-Nadeau, 2011. "Propagation in a Model of Goods, Labor and Financial Market Frictions," 2011 Meeting Papers 119, Society for Economic Dynamics.
  14. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262200716, December.
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  1. Razor innovation in macroeconomics
    by Economic Logician in Economic Logic on 2011-07-15 14:13:00

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