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Persistence, Propagation and On-the-Job Search

Author

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  • Michael Krause
  • Thomas A. Lubik

Abstract

Standard business cycle models often have difficulty matching salient stylized facts such as hump-shaped responses to shocks or persistence. This is mainly due to the lack of a strong endogenous propagation mechanism. In this paper we demonstrate that a real business cycle with a labor market characterised by search and matching and, crucially, on-the-job search can resolve these shortcomings. We show that on-the-job search is a key component in explaining labor market dynamics in models of equilibrium unemployment. The model predicts fluctuations of unemployment, vacancies, and labor productivity whose relative magnitudes replicate the data. Moreover, the interaction between on-the-job search and job creation also generates a strong internal propagation mechanism that leads endogenously to a hump-shaped response of output to technology shocks. The model can replicate the business cycle facts without the high degree of exogenous persistence required in standard models

Suggested Citation

  • Michael Krause & Thomas A. Lubik, 2005. "Persistence, Propagation and On-the-Job Search," Computing in Economics and Finance 2005 345, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:345
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    More about this item

    Keywords

    Search and Matching; Business Cycle Facts; Endogenous Propagation;

    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
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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