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Involuntary Unemployment and the Business Cycle

  • Mathias Trabandt

    (ECB and Riksbank)

  • Karl Walentin

    (Riksbank)

  • Lawrence J. Christiano

    (Northwestern University)

We propose a model in which unemployed people satisfy three conditions: (i) they are making efforts to find work, (ii) they are ready and able to work and (iii) they would be better off if they find a job than if they do not. A person who satisfies (i) and (ii) meets the US Bureau of Labor Statistics' definition of unemployment. We integrate our model into the simple New Keynesian framework with no capital and show that the result is a general equilibrium interpretation of the NAIRU. We integrate the model into a medium sized DSGE model with capital and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy and two technology shocks.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 129.

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Date of creation: 2010
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Handle: RePEc:red:sed010:129
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