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Involuntary Unemployment and the Business Cycle

Author

Listed:
  • Mathias Trabandt

    (ECB and Riksbank)

  • Karl Walentin

    (Riksbank)

  • Lawrence J. Christiano

    (Northwestern University)

Abstract

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.

Suggested Citation

  • Mathias Trabandt & Karl Walentin & Lawrence J. Christiano, 2010. "Involuntary Unemployment and the Business Cycle," 2010 Meeting Papers 129, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:129
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    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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