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Deep habits and the cyclical behaviour of equilibrium unemployment and vacancies

  • di Pace, Federico


    (Department of Economics, Mathematics and Statistics, Birkbeck, University of London)

  • Faccini, Renato


    (Bank of England)

We extend the standard textbook search and matching model by introducing deep habits in consumption. The cyclical fluctuations of vacancies and unemployment in our model can replicate those observed in the US data, with labour market tightness being 20 times more volatile than consumption. Vacancies display a hump-shaped response to technology shocks as well as autocorrelation coefficients that are in line with the empirical evidence. Our model preserves the assumption of fully flexible wages for the new hires and the calibration is consistent with the estimated elasticity of unemployment to unemployment benefits. The numerical simulations generate an artificial Beveridge curve which is in line with the data.

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Paper provided by Bank of England in its series Bank of England working papers with number 391.

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Length: 26 pages
Date of creation: 03 Jun 2010
Date of revision:
Handle: RePEc:boe:boeewp:0391
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