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Stochastic Dynamics and Matching in the Old Keynesian Economics: A Rationale for the Shimer's Puzzle

  • Marco Guerrazzi

Following the Farmer’s (2008a-b, 2010) micro-foundation of the General Theory, I build a competitive search model in which output and employment are demand-driven, prices are flexible, the nominal wage is used as numeraire and agents are divided in two categories: wage and profit earners. Within this framework, I show that the model economy has a continuum of demand constrained equilibria that might be consistent with a certain degree of endogenous real wage stickiness. Moreover, calibrating and simulating the model economy in order to fit the US first-moments data, I show that this setting can provide a rationale for the Shimer’s (2005) puzzle, i.e., the relative stability of real wages in spite of the large volatility of labor market tightness.

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Paper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2010/95.

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Date of creation: 18 Jan 2010
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Handle: RePEc:pie:dsedps:2010/95
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