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Global dynamics in a model with search and matching in labor and capital markets

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  • Ernst, Ekkehard
  • Semmler, Willi

Abstract

In this paper global macroeconomic dynamics are studied when search frictions are present in both labor and capital markets. On the basis of the Merz (1995) macroeconomic model with labor market frictions and capital accumulation, our paper offers an extension to frictions in capital markets, analogously modeled as a search and matching process. Using the Merz model as limit case, we consider exogenous as well as endogenous borrowing constraints. We also allow the cost of issuing bonds to change endogenously. As we show, capital market frictions exacerbate and accentuate the interaction between the two markets and magnify the effects of shocks on output, consumption, employment, and welfare. This interaction of the frictions in labor and capital markets are also shown to give rise to multiple equilibria. On the basis of numerical solution techniques, instead of relying on first or second order approximations around a (unique) steady state, our paper uses dynamic programming techniques to compute decision variables and the value function directly and assess the local and global dynamics of the model. The steady state solutions are studied by using the Hamiltonian and the dynamics are assessed for various model variants by using dynamic programming techniques.

Suggested Citation

  • Ernst, Ekkehard & Semmler, Willi, 2010. "Global dynamics in a model with search and matching in labor and capital markets," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1651-1679, September.
  • Handle: RePEc:eee:dyncon:v:34:y:2010:i:9:p:1651-1679
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    Cited by:

    1. Mittnik, Stefan & Semmler, Willi, 2013. "The real consequences of financial stress," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1479-1499.
    2. repec:eee:dyncon:v:81:y:2017:i:c:p:115-139 is not listed on IDEAS
    3. Mumtaz, Haroon & Zanetti, Francesco, 2016. "The Effect Of Labor And Financial Frictions On Aggregate Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 20(01), pages 313-341, January.
    4. Willi Semmler & Christian R. Proaño, 2015. "Escape Routes from Sovereign Default Risk in the Euro Area," International Symposia in Economic Theory and Econometrics,in: Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons, volume 24, pages 163-193 Emerald Publishing Ltd.
    5. Giuseppe Ciccarone & Francesco Giuli & Danilo Liberati, 2012. "The effects of monetary policy shocks in credit and labor markets with search and matching frictions," Working Papers 151, University of Rome La Sapienza, Department of Public Economics.
    6. Ernst, Ekkehard & Semmler, Willi & Haider, Alexander, 2017. "Debt-deflation, financial market stress and regime change – Evidence from Europe using MRVAR," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 115-139.
    7. Stefan Mittnik & Willi Semmler, 2011. "The Instability of the Banking Sector and Macrodynamics: Theory and Empirics," DEGIT Conference Papers c016_080, DEGIT, Dynamics, Economic Growth, and International Trade.
    8. Semmler, Willi & Chen, Pu, 2014. "Financial stress, regime switching and macrodynamics: Theory and empirics for the US, the EU and non-EU countries," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-42.
    9. Ciccarone, Giuseppe & Giuli, Francesco & Liberati, Danilo, 2014. "Incomplete interest rate pass-through under credit and labor market frictions," Economic Modelling, Elsevier, vol. 36(C), pages 645-657.
    10. Willi Semmler & Stefan Mittnik, 2012. "Estimating a Banking-Macro Model for Europe Using a Multi-Regime VAR," EcoMod2012 4122, EcoMod.
    11. Danilo Liberati, 2014. "An estimated DSGE model with search and matching frictions in the credit market," Temi di discussione (Economic working papers) 986, Bank of Italy, Economic Research and International Relations Area.
    12. Caulkins, Jonathan P. & Feichtinger, Gustav & Grass, Dieter & Hartl, Richard F. & Kort, Peter M. & Seidl, Andrea, 2015. "Skiba points in free end-time problems," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 404-419.
    13. Mittnik, Stefan & Semmler, Willi, 2012. "Regime dependence of the fiscal multiplier," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 502-522.
    14. Lazaryan, Nika & Lubik, Thomas A., 2017. "Global Dynamics in a Search and Matching Model of the Labor Market," Working Paper 17-12, Federal Reserve Bank of Richmond.
    15. Ekkehard Ernst & Stefan Mittnik & Willi Semmler, 2016. "Interaction of Labour and Credit Market in Growth Regimes: A Theoretical and Empirical Analysis," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 45(3), pages 393-422, November.

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