Macroeconomic Fluctuations and Bargaining

35 Pages Posted: 29 Nov 2012

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: July 1, 2001

Abstract

I study the limit rule for bilateral bargaining when agents recognize that the aggregate economy (influencing the match surplus) follows a dynamic process that randomly switches back and forth between a finite number of possible states. The rule derived in this paper is of special importance for decentralized exchange economies with bargaining. Two simple applications are presented to illustrate this fact. The first example is a model of wage bargaining and trade externalities. I show that in those situations sophisticated bargaining tends to increase the volatility (due to extrinsic uncertainty) of the wage bill. The second example is based on the Kiyotaki-Wright model of money. I explain how equilibrium prices depend in a fundamental way on the dynamic bargaining solution.

Keywords: dynamic bargaining, decentralized exchange, sunspots

JEL Classification: C78, E30, E24

Suggested Citation

Ennis, Huberto M., Macroeconomic Fluctuations and Bargaining (July 1, 2001). FRB Richmond Working Paper No. 01-4. Available at SSRN: https://ssrn.com/abstract=2182233 or http://dx.doi.org/10.2139/ssrn.2182233

Huberto M. Ennis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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