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Unemployment and Business Cycles

  • Lawrence J. Christiano
  • Martin S. Eichenbaum
  • Mathias Trabandt

We develop and estimate a general equilibrium search and matching model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, we do not impose wage inertia. Instead we derive wage inertia from our specification of how firms and workers negotiate wages. Our model outperforms a variant of the standard New Keynesian Calvo sticky wage model. According to our estimated model, there is a critical interaction between the degree of price stickiness, monetary policy and the duration of an increase in unemployment benefits.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19265.

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Date of creation: Aug 2013
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Handle: RePEc:nbr:nberwo:19265
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