IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/26351.html
   My bibliography  Save this paper

A Plucking Model of Business Cycles

Author

Listed:
  • Stéphane Dupraz
  • Emi Nakamura
  • Jón Steinsson

Abstract

In standard models, economic activity fluctuates symmetrically around a “natural rate” and stabilization policies can dampen these fluctuations but do not affect the average level of activity. An alternative view—labeled the “plucking model” by Milton Friedman—is that economic fluctuations are drops below the economy’s full potential ceiling. We show that the dynamics of the unemployment rate in the US display a striking asymmetry that strongly favors the plucking model: increases in unemployment are followed by decreases of similar amplitude, while the amplitude of the increase is not related to the amplitude of the previous decrease. We develop a microfounded plucking model of the business cycle. In our model, the plucking asymmetry results from downward nominal wage rigidity, which we rationalize using a search model. Our model also matches the fact that unemployment rises much faster during recessions than it falls during expansions. In our plucking model, stabilization policy lowers average unemployment and thereby yields sizable welfare gains.

Suggested Citation

  • Stéphane Dupraz & Emi Nakamura & Jón Steinsson, 2019. "A Plucking Model of Business Cycles," NBER Working Papers 26351, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26351
    Note: EFG ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w26351.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
    2. Olivier Blanchard & Jordi Galí, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 1-30, April.
    3. Mary C. Daly & Bart Hobijn & Brian Lucking, 2012. "Why has wage growth stayed strong?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue apr2.
    4. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August.
    5. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    6. Kim, Chang-Jin & Nelson, Charles R, 1999. "Friedman's Plucking Model of Business Fluctuations: Tests and Estimates of Permanent and Transitory Components," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 317-334, August.
    7. Sichel, Daniel E, 1993. "Business Cycle Asymmetry: A Deeper Look," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 224-236, April.
    8. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1371-1406.
    9. David H. Autor & David Dorn & Gordon H. Hanson & Jae Song, 2014. "Trade Adjustment: Worker-Level Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1799-1860.
    10. Mary C. Daly & Bart Hobijn, 2014. "Downward Nominal Wage Rigidities Bend the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(S2), pages 51-93, October.
    11. Antoine Lepetit, 2020. "Asymmetric Unemployment Fluctuations and Monetary Policy Trade-Offs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 29-45, April.
    12. Kim, Jinill & Ruge-Murcia, Francisco J., 2009. "How much inflation is necessary to grease the wheels?," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 365-377, April.
    13. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    14. repec:fth:harver:1418 is not listed on IDEAS
    15. Joseph G. Altonji & Paul J. Devereux, 1999. "The Extent and Consequences of Downward Nominal Wage Rigidity," NBER Working Papers 7236, National Bureau of Economic Research, Inc.
    16. Robert E. Hall & Paul R. Milgrom, 2008. "The Limited Influence of Unemployment on the Wage Bargain," American Economic Review, American Economic Association, vol. 98(4), pages 1653-1674, September.
    17. Philippe Andrade & Jordi Galí & Hervé Le Bihan & Julien Matheron, 2017. "The optimal inflation target and the natural rate of interest," Economics Working Papers 1591, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2019.
    18. Jung, Philip & Kuester, Keith, 2011. "The (un)importance of unemployment fluctuations for the welfare cost of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1744-1768, October.
    19. Pascal Michaillat, 2012. "Do Matching Frictions Explain Unemployment? Not in Bad Times," American Economic Review, American Economic Association, vol. 102(4), pages 1721-1750, June.
    20. Fujita, Shigeru & Ramey, Garey, 2007. "Job matching and propagation," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3671-3698, November.
    21. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September.
    22. Pierpaolo Benigno & Luca Antonio Ricci, 2011. "The Inflation-Output Trade-Off with Downward Wage Rigidities," American Economic Review, American Economic Association, vol. 101(4), pages 1436-1466, June.
    23. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December.
    24. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    25. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    26. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.
    27. David Card & Dean Hyslop, 1997. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 71-122, National Bureau of Economic Research, Inc.
    28. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    29. Per Krusell & Toshihiko Mukoyama & Aysegul Sahin & Anthony A. Smith, Jr., 2009. "Revisiting the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 393-402, July.
    30. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1371-1406.
    31. McKay, Alisdair & Reis, Ricardo, 2008. "The brevity and violence of contractions and expansions," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 738-751, May.
    32. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 433-494.
    33. Alessandro Barattieri & Susanto Basu & Peter Gottschalk, 2014. "Some Evidence on the Importance of Sticky Wages," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(1), pages 70-101, January.
    34. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
    35. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-1383, December.
    36. Peter Gottschalk, 2005. "Downward Nominal-Wage Flexibility: Real or Measurement Error?," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 556-568, August.
    37. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    38. Nicolas Petrosky‐Nadeau & Lu Zhang, 2017. "Solving the Diamond–Mortensen–Pissarides model accurately," Quantitative Economics, Econometric Society, vol. 8(2), pages 611-650, July.
    39. Wesley Clair Mitchell, 1927. "Business Cycles: The Problem and Its Setting," NBER Books, National Bureau of Economic Research, Inc, number mitc27-1, December.
    40. 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.
    41. Murat Tasci & Nicholas Zevanove, 2019. "Do Longer Expansions Lead to More Severe Recessions?," Economic Commentary, Federal Reserve Bank of Cleveland, issue January.
    42. Wesley Clair Mitchell, 1927. "Introductory pages to "Business Cycles: The Problem and Its Setting"," NBER Chapters, in: Business Cycles: The Problem and Its Setting, pages -23, National Bureau of Economic Research, Inc.
    43. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Basu, S. & House, C.L., 2016. "Allocative and Remitted Wages," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 297-354, Elsevier.
    2. Abo-Zaid, Salem, 2013. "Optimal monetary policy and downward nominal wage rigidity in frictional labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 345-364.
    3. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    4. Santoro, Emiliano & Petrella, Ivan & Pfajfar, Damjan & Gaffeo, Edoardo, 2014. "Loss aversion and the asymmetric transmission of monetary policy," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 19-36.
    5. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    6. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    7. Federico Di Pace & Matthias Hertweck, 2019. "Labor Market Frictions, Monetary Policy, and Durable Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 274-304, April.
    8. Mary C. Daly & Bart Hobijn, 2014. "Downward Nominal Wage Rigidities Bend the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(S2), pages 51-93, October.
    9. Amaral, Pedro S. & Tasci, Murat, 2016. "The cyclical behavior of equilibrium unemployment and vacancies across OECD countries," European Economic Review, Elsevier, vol. 84(C), pages 184-201.
    10. Barnichon, Regis, 2012. "Vacancy posting, job separation and unemployment fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 36(3), pages 315-330.
    11. Liu, Zheng & Miao, Jianjun & Zha, Tao, 2016. "Land prices and unemployment," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 86-105.
    12. Jean-Olivier Hairault & Francois Langot & Sophie Osotimehin, 2010. "Matching frictions, unemployment dynamics and the cost of business cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 759-779, October.
    13. Fahr Staphen & Abbritti Mirko, 2011. "Macroeconomic implications of downward wage rigidities," wp.comunite 0088, Department of Communication, University of Teramo.
    14. Lechthaler, Wolfgang & Merkl, Christian & Snower, Dennis J., 2010. "Monetary persistence and the labor market: A new perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 968-983, May.
    15. Eleni Iliopulos & François Langot & Thepthida Sopraseuth, 2019. "Welfare Cost of Fluctuations When Labor Market Search Interacts with Financial Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(8), pages 2207-2237, December.
    16. Bruce Fallick & Michael Lettau & William L. Wascher, 2016. "Downward Nominal Wage Rigidity in the United States during and after the Great Recession," Working Papers (Old Series) 1602, Federal Reserve Bank of Cleveland.
    17. Iwasaki, Yuto & Muto, Ichiro & Shintani, Mototsugu, 2021. "Missing wage inflation? Estimating the natural rate of unemployment in a nonlinear DSGE model," European Economic Review, Elsevier, vol. 132(C).
    18. Aruoba, S. Borağan & Bocola, Luigi & Schorfheide, Frank, 2017. "Assessing DSGE model nonlinearities," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 34-54.
    19. Mumtaz, Haroon & Theodoridis, Konstantinos, 2020. "Dynamic effects of monetary policy shocks on macroeconomic volatility," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 262-282.
    20. Marco Fongoni, 2018. "Workers' reciprocity and the (ir)relevance of wage cyclicality for the volatility of job creation," Working Papers 1809, University of Strathclyde Business School, Department of Economics.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:26351. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.