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Involuntary Unemployment and the Business Cycle

  • Christiano, Lawrence J.

    ()

    (Northwestern University)

  • Trabrandt, Mathias

    ()

    (European Central Bank)

  • Walentin, Karl

    ()

    (Research Department, Central Bank of Sweden)

Can a model with limited labor market insurance explain standard macro- and labor market data jointly? We seek to construct a monetary model in which: i) the unemployed are worse off than the employed, i.e. unemployment is involuntary and ii) the labor force participation rate varies with the business cycle. To illustrate key features of our model, we start with the simplest possible New Keynesian framework with no capital. We then integrate the model into a medium sized DSGE model and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to these three shocks.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 238.

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Length: 69 pages
Date of creation: 01 Apr 2010
Date of revision: 01 Jun 2012
Handle: RePEc:hhs:rbnkwp:0238
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