Involuntary Unemployment and the Business Cycle
Lawrence J. Christiano
Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)
Board of Governors of the Federal Reserve System; Sveriges Riksbank
Federal Reserve Bank of Atlanta CQER Working Paper No. 10-03
We propose a monetary model in which the unemployed satisfy the official U.S. definition of unemployment: people without jobs who are (1) currently making concrete efforts to find work and (2) willing and able to work. In addition, our model has the property that people searching for jobs are better off if they find a job than if they do not (that is, unemployment is involuntary). We integrate our model of involuntary unemployment into the simple new Keynesian framework with no capital and use the resulting model to discuss the concept of the nonaccelerating inflation rate of unemployment. We then 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 shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to the three shocks.
Number of Pages in PDF File: 53
Keywords: unemployment, job search, new Keynesian, nonaccelerating inflation rate of unemployment
JEL Classification: E02, E3, E5, J2, J6
Date posted: September 23, 2010
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