Carnegie Mellon University - David A. Tepper School of Business; Federal Reserve Banks - Federal Reserve Bank of San Francisco
Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)
December 1, 2013
Fisher College of Business Working Paper No. 2014-03-11
Charles A. Dice Center Working Paper No. 2014-11
A search and matching model, when calibrated to the mean and volatility of unemployment in the postwar sample, can potentially explain the unemployment crisis in the Great Depression. The limited responses of wages from credible bargaining to labor market conditions, along with the congestion externality from matching frictions, cause the unemployment rate to rise sharply in recessions but decline gradually in booms. The frequency, severity, and persistence of unemployment crises in the model are quantitatively consistent with U.S. historical time series. The welfare gain from eliminating business cycle fluctuations is large.
Number of Pages in PDF File: 49
Keywords: Search and matching frictions, unemployment crises, the unemployment volatility puzzle, projection, nonlinear impulse response functions, the Great Depression
JEL Classification: E24, E32, J63, J64
Date posted: March 31, 2013 ; Last revised: July 16, 2014
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