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Business Cycles With Costly Search and Recruiting

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  • Peter Howitt

Abstract

A business cycle model is developed in which output is traded on Lucas-Phelps islands and labor services on each island are exchanged through costly search and recruiting with transactions externalities. The model exhibits persistent involuntary unemployment and inefficient equilibria, even though there are no nominal rigidities and no unexploited privately attainable gains from trade. It also exhibits employment fluctuations without any real-wage fluctuations. It yields a Lucas aggregate-supply curve (to a linear approximation). It also implies that the natural rate of unemployment depends positively upon the variability and persistence of relative price shocks.

Suggested Citation

  • Peter Howitt, 1988. "Business Cycles With Costly Search and Recruiting," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 147-165.
  • Handle: RePEc:oup:qjecon:v:103:y:1988:i:1:p:147-165.
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    File URL: http://hdl.handle.net/10.2307/1882646
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    1. Abbritti, Mirko & Boitani, Andrea & Damiani, Mirella, 2006. "Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs," MPRA Paper 2252, University Library of Munich, Germany, revised Jan 2007.
    2. Murphy, Kevin J. & Payne, James E., 2003. "Explaining change in the natural rate of unemployment: A regional approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 345-368.
    3. Werner Roeger & Jan in 't Veld, 1997. "QUEST II. A Multi-Country Business Cycle and Growth Model," European Economy - Economic Papers 2008 - 2015 123, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Eijs P. van & Heijke H., 1996. "The Relation between the Wage, Job-related Training and the Quality of the Match between Occupations and the Types of Education," ROA Research Memorandum 003, Maastricht University, Research Centre for Education and the Labour Market (ROA).
    5. Ken Burdett & Randall Wright, 1998. "Two-Sided Search with Nontransferable Utility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 220-245, January.
    6. Sorensen, Peter Birch, 1999. "Optimal tax progressivity in imperfect labour markets," Labour Economics, Elsevier, vol. 6(3), pages 435-452, September.
    7. Boianovsky, Mauro, 2000. "Some Cambridge reactions to The General Theory: David Champernowne and Joan Robinson on full employment," Violette Reihe: Schriftenreihe des Promotionsschwerpunkts "Globalisierung und Beschäftigung" 15/2000, University of Hohenheim, Carl von Ossietzky University Oldenburg, Evangelisches Studienwerk.
    8. Caplin, Andrew & Leahy, John, 2000. "Mass layoffs and unemployment," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 121-142, August.
    9. Mortensen, Dale T, 1989. " The Persistence and Indeterminancy of Unemployment in Search Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 347-370.
    10. Mills, Terence C., 1995. "Business cycle asymmetries and non-linearities in U.K. macroeconomic time series," Ricerche Economiche, Elsevier, vol. 49(2), pages 97-124, June.
    11. Fernández-de-Córdoba, Gonzalo & Vázquez, Jesús, 2011. "Unions, monetary shocks and the labour market cycle," Economic Modelling, Elsevier, vol. 28(3), pages 1140-1149, May.
    12. Storer, Paul, 1996. "Separating the effects of aggregate and sectoral shocks with estimates from a Markov-switching search model," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 93-121.
    13. Julien, Ludovic A., 2003. "Chômage d’équilibre, équilibres multiples et défauts de coordination," L'Actualité Economique, Société Canadienne de Science Economique, vol. 79(4), pages 523-562, Décembre.
    14. Richard Rogerson & Robert Shimer & Randall Wright, 2004. "Search-Theoretic Models of the Labor Market-A Survey," NBER Working Papers 10655, National Bureau of Economic Research, Inc.
    15. Boianovsky, Mauro & Presley, John R., 2009. "The Robertson connection between the natural rates of interest and unemployment," Structural Change and Economic Dynamics, Elsevier, vol. 20(2), pages 136-150, June.
    16. Peter N. Ireland, 1995. "Customer flows, countercyclical markups, and the persistent effects of monetary shocks," Working Paper 95-04, Federal Reserve Bank of Richmond.
    17. Zbigniew Dokurno & Bogusław Fiedor, 2016. "Sustainable Development as the Concept of World Economy Development from Contemporary Macroeconomics Perspective," Gospodarka Narodowa, Warsaw School of Economics, issue 2, pages 5-24.
    18. David Andolfatto, 2007. "Search Models of Unemployment," Discussion Papers dp07-01, Department of Economics, Simon Fraser University.
    19. Dilip M. Nachane, 2011. "Selected Problems in the Analysis of Nonstationary & Nonlinear Time Series," Journal of Quantitative Economics, The Indian Econometric Society, vol. 9(1), pages 1-17.
    20. Mirko Abbritti, 2007. "A "Simple" Currency Union Model with Labor Market Frictions, Real Wage Rigidities and Equilibrium Unemployment," IHEID Working Papers 09-2007, Economics Section, The Graduate Institute of International Studies.
    21. R. Bernardini Papalia & S. Bertarelli, 1998. "An Optimal Partnership Search Model: Theoretical Implications for the Europartenariat Event," Working Papers 310, Dipartimento Scienze Economiche, Universita' di Bologna.
    22. Mirko Abbritti & Andrea Boitani & Mirella Damiani, 2012. "Labour Market Imperfections, "Divine Coincidence" and Volatility of Employment and Inflation," Review of Economics and Institutions, Università di Perugia, vol. 3(1).
    23. Kevin Lang & William T. Dickens, 1993. "Bilateral Search as an Explanation for Labor Market Segmentation and Other Anomalies," NBER Working Papers 4461, National Bureau of Economic Research, Inc.

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