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Real Business Cycles with Involuntary Unemployment


  • Gali, Jordi


We develop and analyse a real business cycle model in which both goods and labour markets are characterized by imperfect competition. In equilibrium, unemployment emerges as the result of the market power exercised by insiders at the firm level. We show that a calibrated version of the model is capable of generating both a procyclical labour supply and a countercyclical unemployment rate, in a way qualitatively consistent with US data.
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Suggested Citation

  • Gali, Jordi, 1995. "Real Business Cycles with Involuntary Unemployment," Working Papers 95-12, C.V. Starr Center for Applied Economics, New York University.
  • Handle: RePEc:cvs:starer:95-12

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    References listed on IDEAS

    1. Kiminori Matsuyama, 1991. "Increasing Returns, Industrialization, and Indeterminacy of Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 617-650.
    2. Lucas, Robert E, Jr, 1993. "Making a Miracle," Econometrica, Econometric Society, vol. 61(2), pages 251-272, March.
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    6. King, Robert G & Rebelo, Sergio T, 1993. "Transitional Dynamics and Economic Growth in the Neoclassical Model," American Economic Review, American Economic Association, vol. 83(4), pages 908-931, September.
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    9. Benhabib, Jess & Gali, Jordi, 1995. "On growth and indeterminacy: some theory and evidence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 163-211, December.
    10. Benhabib, Jess & Spiegel, Mark M., 1994. "The role of human capital in economic development evidence from aggregate cross-country data," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 143-173, October.
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    12. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
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    Cited by:

    1. Stephen P Millard, 2000. "The effects of increased labour market flexibility in the United Kingdom: theory and practice," Bank of England working papers 109, Bank of England.
    2. Stephen Millard & Andrew Scott & Marianne Sensier, 1999. "Business cycles and the labour market can theory fit the facts?," Bank of England working papers 93, Bank of England.

    More about this item


    Real business cycles; unemployment; insider outsider models; endogenous markups;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search


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