Involuntary Unemployment and the Business Cycle

Federal Reserve Bank of Atlanta CQER Working Paper No. 10-03

53 Pages Posted: 23 Sep 2010  

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)

Mathias Trabandt

Board of Governors of the Federal Reserve System; Sveriges Riksbank

Karl Walentin

Sveriges Riksbank

Multiple version iconThere are 4 versions of this paper

Date Written: August 2010

Abstract

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.

Keywords: unemployment, job search, new Keynesian, nonaccelerating inflation rate of unemployment

JEL Classification: E02, E3, E5, J2, J6

Suggested Citation

Christiano, Lawrence J. and Trabandt, Mathias and Walentin, Karl, Involuntary Unemployment and the Business Cycle (August 2010). Federal Reserve Bank of Atlanta CQER Working Paper No. 10-03. Available at SSRN: https://ssrn.com/abstract=1680648 or http://dx.doi.org/10.2139/ssrn.1680648

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

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Federal Reserve Bank of Cleveland

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Federal Reserve Bank of Chicago

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Federal Reserve Bank of Minneapolis

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National Bureau of Economic Research (NBER)

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Mathias Trabandt

Board of Governors of the Federal Reserve System ( email )

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United States

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

Karl Walentin

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

HOME PAGE: http://www.riksbank.com/research/walentin

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