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Cyclical Behavior of a Matching Model with Capital Investment

This paper studies the role of capital investment in a search and matching model. I develop an endogenous job separation matching model in which a firm's irreversible capital investment is endogenously determined. The incorporation of capital investment provides an additional channel for firms to respond to productivity shocks, significantly magnifying labor market fluctuations. The numerical results demonstrate that the incorporation of irreversible capital investment improves the ability of the standard search and matching model to generate cyclical fluctuations of unemployment and vacancies in response to productivity shocks. Moreover, my model can generate the pro-cyclicality of vacancies, which the standard endogenous separation models often fail to generate.

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File URL: http://www.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2010_14.pdf
File Function: First version, 2006
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Paper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2010_14.

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Length: 23 pages
Date of creation: Apr 2006
Date of revision: Oct 2010
Handle: RePEc:iuj:wpaper:ems_2010_14
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  1. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2009. "Wage Rigidity and Job Creation," Kiel Working Papers 1504, Kiel Institute for the World Economy.
  2. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle, Second Version," PIER Working Paper Archive 09-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Feb 2009.
  3. Daron Acemoglu, 1999. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," American Economic Review, American Economic Association, vol. 89(5), pages 1259-1278, December.
  4. Silva, José Ignacio & Toledo, Manuel, 2009. "Labor Turnover Costs And The Cyclical Behavior Of Vacancies And Unemployment," Macroeconomic Dynamics, Cambridge University Press, vol. 13(S1), pages 76-96, May.
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  6. Krause, Michael & Lubik, Thomas A., 2007. "On-the-job search and the cyclical dynamics of the labor market," Discussion Paper Series 1: Economic Studies 2007,15, Deutsche Bundesbank, Research Centre.
  7. Dale T. Mortensen, 2005. "More on Unemployment and Vacancy Fluctuations," 2005 Meeting Papers 326, Society for Economic Dynamics.
  8. Petrongolo, Barbara & Pissarides, Christopher, 2000. "Looking Into The Black Box: A Survey Of The Matching Function," CEPR Discussion Papers 2409, C.E.P.R. Discussion Papers.
  9. Simon Burgess & Helene Turon, 2005. "Worker Flows, Job Flows and Unemployment in a Matching Model," Bristol Economics Discussion Papers 05/572, Department of Economics, University of Bristol, UK.
  10. Dale Mortensen & �va Nagypál, 2008. "Labor-market Volatility in Matching Models with Endogenous Separations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(4), pages 645-665, 03.
  11. Garey Ramey, 2008. "Exogenous vs. Endogenous Separation," 2008 Meeting Papers 466, Society for Economic Dynamics.
  12. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  13. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  14. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  15. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
  16. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
  17. Steven J. Davis & R. Jason Faberman & John Haltiwanger, 2006. "The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links," NBER Working Papers 12167, National Bureau of Economic Research, Inc.
  18. Murat Tasci, 2007. "On-the-job search and labor market reallocation," Working Paper 0725, Federal Reserve Bank of Cleveland.
  19. Michael W. L. Elsby, 2008. "Marginal Jobs, Heterogeneous Firms, & Unemployment Flows," NBER Working Papers 13777, National Bureau of Economic Research, Inc.
  20. Eran Yashiv, 2005. "Evaluating the Performance of the Search and Matching Model," CEP Discussion Papers dp0677, Centre for Economic Performance, LSE.
  21. Robert E. Hall & Paul R. Milgrom, 2007. "The Limited Influence of Unemployment on the Wage Bargain," Levine's Bibliography 321307000000000135, UCLA Department of Economics.
  22. Zhang Min, 2008. "Cyclical Behavior of Unemployment and Job Vacancies: A Comparison between Canada and the United States," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-37, October.
  23. Garey Ramey & Wouter J. den Haan & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June.
  24. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228 Elsevier.
  25. James Costain & Michael Reiter, 2005. "Business Cycles, Unemployment Insurance and the Calibration of Matching Models," Working Papers 215, Barcelona Graduate School of Economics.
  26. Ramey, Garey, 2008. "Exogenous vs. Endogenous Separation," University of California at San Diego, Economics Working Paper Series qt0qb196qd, Department of Economics, UC San Diego.
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