Unemployment and Business Cycles

68 Pages Posted: 5 Dec 2013

See all articles by Lawrence J. Christiano

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)

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Mathias Trabandt

Goethe University in Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: September 24, 2013

Abstract

We develop and estimate a general equilibrium model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, wages are not subject to exogenous nominal rigidities. Instead we derive wage inertia from our specification of how firms and workers interact when negotiating wages. Our model outperforms the standard Diamond-Mortensen-Pissarides model both statistically and in terms of the plausibility of the estimated structural parameter values. Our model also outperforms an estimated sticky wage model.

Keywords: unemployment, business cycles, wage inertia, Bayesian estimation

JEL Classification: E2, E24, E32

Suggested Citation

Christiano, Lawrence J. and Eichenbaum, Martin and Trabandt, Mathias, Unemployment and Business Cycles (September 24, 2013). FRB International Finance Discussion Paper No. 1089, Available at SSRN: https://ssrn.com/abstract=2363493 or http://dx.doi.org/10.2139/ssrn.2363493

Lawrence J. Christiano

Northwestern University ( email )

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Martin Eichenbaum

Northwestern University ( email )

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National Bureau of Economic Research (NBER)

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Mathias Trabandt (Contact Author)

Goethe University in Frankfurt ( email )

Germany

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