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Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance

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  • Makoto Nakajima

Abstract

The author introduces risk-averse preferences, labor-leisure choice, capital, individual productivity shocks, and market incompleteness to the standard Mortensen-Pissarides model of search and matching and explore the model's cyclical properties. There are four main findings. First and foremost, the baseline model can generate the observed large volatility of unemployment and vacancies with a realistic replacement ratio of the unemployment insurance benefits of 64 percent. Second, labor-leisure choice plays a crucial role in generating the large volatilities; additional utility from leisure when unemployed makes the value of unemployment close to the value of employment, which is crucial in generating a strong amplification, even with the moderate replacement ratio. Besides, it contributes to the amplification through an adjustment in the intensive margin of labor supply. Third, the borrowing constraint or uninsured individual productivity shocks do not significantly affect the cyclical properties of unemployment and vacancies: Most workers are well insured only with self-insurance. Fourth, the model better replicates the business cycle properties of the U.S. economy, thanks to the co-existence of adjustments in the intensive and extensive margins of labor supply and the stronger amplification.
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  • Makoto Nakajima, 2012. "Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 399-432, May.
  • Handle: RePEc:wly:iecrev:v:53:y:2012:i:2:p:399-432
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    Cited by:

    1. Leena Rudanko, 2011. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 101(6), pages 2823-2843, October.
    2. Alisdair McKay & Tamas Papp, 2011. "Accounting for Idiosyncratic Wage Risk Over the Business Cycle," Boston University - Department of Economics - Working Papers Series WP2011-028, Boston University - Department of Economics.
    3. Zhen Huo & Jose-Victor Rios-Rull, 2015. "Tightening Financial Frictions on Households, Recessions, and Price Reallocations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 118-139, January.
    4. Edouard Challe & Julien Matheron & Xavier Ragot & Juan F. Rubio‐Ramirez, 2017. "Precautionary saving and aggregate demand," Quantitative Economics, Econometric Society, vol. 8(2), pages 435-478, July.
    5. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 358-385.
    6. Den Haan, Wouter J., 2010. "Assessing the accuracy of the aggregate law of motion in models with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 79-99, January.
    7. Per Krusell & Toshihiko Mukoyama & Ayşegül Şahin, 2010. "Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1477-1507.
    8. Francesc Obiols Homs, 2012. "Search and matching in the labor market without unemployment insurance," 2012 Meeting Papers 340, Society for Economic Dynamics.
    9. Emine Boz & Ceyhun Bora Durdu & Nan Li, 2009. "Labor market search in emerging economies," International Finance Discussion Papers 989, Board of Governors of the Federal Reserve System (U.S.).
    10. Cacciatore, Matteo & Ghironi, Fabio & Lee, Yurim, 2016. "Financial market integration, exchange rate policy, and the dynamics of business and employment in Korea," Journal of the Japanese and International Economies, Elsevier, vol. 42(C), pages 79-99.
    11. Nakajima, Makoto, 2012. "A quantitative analysis of unemployment benefit extensions," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 686-702.
    12. Gordon Phillips & Kyle Herkenhoff, 2015. "The Impact of Consumer Credit Constraints on Earnings, Sorting, and Job Finding Rates of Displaced Workers," 2015 Meeting Papers 375, Society for Economic Dynamics.
    13. repec:eee:ecmode:v:67:y:2017:i:c:p:125-135 is not listed on IDEAS
    14. Jose Mustre-del-Rio, 2015. "Wealth and Labor Supply Heterogeneity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 619-634, July.
    15. Matteo Cacciatore & Giuseppe Fiori, 2016. "The Macroeconomic Effects of Goods and Labor Marlet Deregulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 1-24, April.
    16. Jiwoon Kim, 2013. "Bargaining with Existing Workers, Over-hiring of Firms, and Labor Market Fluctuations," 2013 Meeting Papers 721, Society for Economic Dynamics.
    17. Nils Gornemann & Keith Kuester & Makoto Nakajima, 2012. "Monetary policy with heterogeneous agents," Working Papers 12-21, Federal Reserve Bank of Philadelphia.
    18. Carlos Miguel Silva & Ana Paula Ribeiro, 2011. "The Impacts of Structural Changes in the Labor Market: a Comparative Statics Analysis Using Heterogeneous-agent Framework," CEF.UP Working Papers 1104, Universidade do Porto, Faculdade de Economia do Porto.
    19. repec:prs:ecstat:estat_0336-1454_2017_num_494_1_10781 is not listed on IDEAS
    20. Yongsung Chang & Sun-Bin Kim & Frank Schorfheide, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," RCER Working Papers 556, University of Rochester - Center for Economic Research (RCER).
    21. Marco Cozzi, 2015. "The Krusell–Smith Algorithm: Are Self-Fulfilling Equilibria Likely?," Computational Economics, Springer;Society for Computational Economics, vol. 46(4), pages 653-670, December.
    22. Zhen Huo & Jose-Victor Rios-Rull, 2012. "Engineering a paradox of thrift recession," Staff Report 478, Federal Reserve Bank of Minneapolis.
    23. Giuseppe Ciccarone & Francesco Giuli & Enrico Marchetti, 2016. "Search frictions and labor market dynamics in a real business cycle model with undeclared work," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 409-442, August.
    24. Marcin Woźniak, 2015. "Can the Stochastic Equilibrium Job Search Models Fit Transition Economies?," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 65(4), pages 567-591, December.
    25. Tom Krebs & Martin Scheffel, 2013. "Macroeconomic Evaluation of Labor Market Reform in Germany," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(4), pages 664-701, December.

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