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Can Cotract-Based Models Explain Business Cycles?

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  • Phaneuf, L.

Abstract

This Paper Questions the Capacity of the Two Leading Categories of Contract-Based Models of the Business Cycle to Give a Satisfactory Explanation for the Dynamic Behavior of Aggregates. Firstly, an Expected Market-Clearing Model That Is Designed to Account for the Dynamic Propagation of Shocks Is Unable to Produce a Situation of Prolonged Involuntary Unemployment Contrary to the Patterns of Persistence Observed Empirically in Unemployment Rate Series. Secondly, a Staggered Contracts Model with a Constant Nominal Wage over the Course of a Contract Generates Persistent Negative Effects of Demand Shocks on Output After a One-Period Lag When the Usual Arbitrary Restriction on the Information Available to Wage Setters Is Relaxed. Finally, When the Nominal Wage Is Allowed to Vary During a Contract the Staggered Contracts Model Is Unable to Produce Effects of Shocks That Last Longer Than the Contract Length As in the Original Expected Market-Clearing Models.

Suggested Citation

  • Phaneuf, L., 1987. "Can Cotract-Based Models Explain Business Cycles?," Cahiers de recherche 8727, Universite de Montreal, Departement de sciences economiques.
    • Handle: RePEc:mtl:montde:8727
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    Keywords

    Contracts ; Models ; Wages;
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