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on Dynamic General Equilibrium |
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Issue of 2013‒12‒06
24 papers chosen by |
| By: | Rangan Gupta; Patrick Kanda; Mampho Modise; Alessia Paccagnini |
| Abstract: | Inflation forecasts are a key ingredient for monetary policymaking - especially in an inflation targeting country such as South Africa. Generally, a typical Dynamic Stochastic General Equilibrium (DSGE) only includes a core set of variables. As such, other variables, e.g. such as alternative measures of inflation that might be of interest to policymakers, do not feature in the model. Given this, we implement a closed-economy New Keynesian DSGE model-based procedure which includes variables that do not explicitly appear in the model. We estimate such a model using an in-sample covering 1971Q2 to 1999Q4, and generate recursive forecasts over 2000Q1-2011Q4. The hybrid DSGE performs extremely well in forecasting inflation variables (both core and non-modeled) in comparison with forecasts reported by other models such as AR(1). |
| Keywords: | DSGE model, in ation, core variables, non-core variables |
| JEL: | C11 C32 C53 E27 E47 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:259&r=dge |
| By: | Michael Hatcher |
| Abstract: | This paper presents a general equilibrium model in which nominal government debt pays an inflation risk premium. The model predicts that the inflation risk premium will be higher in economies which are exposed to unanticipated inflation through nominal asset holdings. In particular, the inflation risk premium is higher when government debt is primarily nominal, steady-state inflation is low, and when cash and nominal debt account for a large fraction of consumers’ retirement portfolios. These channels do not appear to have been highlighted in previous models or tested empirically. Numerical results suggest that the inflation risk premium is comparable in magnitude to standard representative agent models. These findings have implications for management of government debt, since the inflation risk premium makes it more costly for governments to borrow using nominal rather than indexed debt. Simulations of an extended model with Epstein-Zin preferences suggest that increasing the share of indexed debt would enable governments to permanently lower taxes by an amount that is quantitatively non-trivial. |
| Keywords: | government debt; inflation risk premium; overlapping generations |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2013_17&r=dge |
| By: | Aleksandar Vasilev |
| Abstract: | Motivated by the high public employment, and the public wage premia observed in Europe, a Real-Business-Cycle model, calibrated to German data (1970-2007), is set up with a richer government spending side, and an endogenous private-public sector labor choice. To illustrate the effects of fiscal policy, two regimes are compared and contrasted to one another - exogenous vs. optimal (Ramsey) policy case. The main findings from the computational experiments performed in this paper are: (i) The op- timal steady-state capital tax rate is zero; (ii) A higher labor tax rate is needed in the Ramsey case to compensate for the loss in capital tax revenue; (iii) Under the optimal policy regime, public sector employment is lower, but government employees receive higher wages; (iv) The benevolent Ramsey planner provides the optimal amount of the public good, substitutes labor for capital in the input mix for public services produc- tion, and private output; (v) Government wage bill is smaller, while public investment is three times higher than in the exogenous policy case. |
| Keywords: | optimal policy, government spending, public employment and wages |
| JEL: | E69 E62 E32 H40 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2013_18&r=dge |
| By: | William Dupor; M. Saif Mehkari |
| Abstract: | This paper constructs several models in which, unlike the standard neoclassical growth model, positive news about future technology generates an increase in current consumption, hours and investment. These models are said to exhibit procyclical news shocks. We find that all models that exhibit procyclical news shocks in our paper have two commonalities. There are mechanisms to ensure that: (I) consumption does not crowd out investment, or vice versa; (II) the benefit of forgoing leisure in response to news shocks outweighs the cost. Among the models we consider, we believe, one model holds the greatest potential for explaining procyclical news shocks. Its critical assumption is that news of the future technology also illuminates the nature of this technology. This illumination in turn permits economic actors to invest in capital that is forward-compatible, i.e. adapted to the new technology. On the technical side, our paper reintroduces the Laplace transform as a tool for studying dynamic economies analytically. Using Laplace transforms we are able to study and prove results about the full dynamics of the model in response to news shocks. |
| Keywords: | Business cycles ; Economic growth ; Technology |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2013-036&r=dge |
| By: | Federico DI PACE; Stefania VILLA |
| Abstract: | We propose and estimate, using Bayesian techniques, a Dynamic Stochastic General Equilibrium model featuring search and matching frictions with redistributive productivity shocks – which account for fluctuations in the distribution of income across factors of production. We first find supporting evidence that the model is able to replicate cyclical properties of labour market variables. We then disentangle two endogenous sources of labour market amplification: (i) deep habits and (ii) the replacement ratio. The latter appears to be a powerful endogenous amplification mechanism given the shock structure of the model. As far as the exogenous amplification is concerned, labour market variability can be largely explained by redistributive innovations. Finally, contrary to Total Factor Productivity shocks, redistributive shocks increase total hours. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces13.23&r=dge |
| By: | Busl, Claudia; Seymen, Atılım |
| Abstract: | While a widespread consensus exists among macroeconomists that the German labour market reforms in 2003-2005 have successfully contributed to the decline of the unemployment rate, critics claim that the reforms led to wage restraint and consequently consumption dampening accompanied by beggar-thy-neighbour effects, harming Germany's trade partners. We check up on the validity of these arguments by means of a two-country DSGE model featuring intra-industry trade and labour market frictions. Our results suggest that the disproportional growth of GDP (labour productivity) in comparison to consumption (wages) are only partially driven by the reforms. However, we do not find that the reforms contribute to Germany's trade surplus and cause negative spillovers to trading partners in terms of output and employment. -- |
| Keywords: | labour market reforms,search and matching,spillover,dynamic stochastic general equilibrium models |
| JEL: | E24 E61 E65 F42 J38 J63 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:13097&r=dge |
| By: | Saroj Bhattarai; Jae Won Lee; Woong Yong Park |
| Abstract: | We investigate the roles of a time-varying inflation target and monetary and fiscal policy stances on the dynamics of inflation in a DSGE model. Under an active monetary and passive fiscal policy regime, inflation closely follows the path of the inflation target and a stronger reaction of monetary policy to inflation decreases the response of inflation to non-policy shocks. In sharp contrast, under an active fiscal and passive monetary policy regime, inflation moves in an opposite direction from the inflation target and a stronger reaction of monetary policy to inflation increases the response of inflation to non-policy shocks. Moreover, a higher level of government debt leads to a greater response of inflation while a weaker response of fiscal policy to debt decreases the response of inflation to non-policy shocks. These results are due to variation in the value of public debt that leads to wealth effects on households. Finally, under a passive monetary and passive fiscal policy regime, both monetary and fiscal policy parameters matter for inflation dynamics, but because of equilibrium indeterminacy, theory provides no clear answer on the overall behavior of inflation. We characterize these results analytically in a simple model and numerically in a quantitative model. |
| Keywords: | Time-varying inflation target, Inflation response, Public debt, Monetary and fiscal policy regimes, Monetary and fiscal policy stances, DSGE model |
| JEL: | E31 E52 E63 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-75&r=dge |
| By: | S. Boragan Aruoba; Luigi Bocola; Frank Schorfheide |
| Abstract: | We develop a new class of nonlinear time-series models to identify nonlinearities in the data and to evaluate nonlinear DSGE models. U.S. output growth and the federal funds rate display nonlinear conditional mean dynamics, while inflation and nominal wage growth feature conditional heteroskedasticity. We estimate a DSGE model with asymmetric wage/price adjustment costs and use predictive checks to assess its ability to account for nonlinearities. While it is able to match the nonlinear inflation and wage dynamics, thanks to the estimated downward wage/price rigidities, these do not spill over to output growth or the interest rate. |
| Keywords: | Wages ; Prices ; Inflation (Finance) ; Nonlinear theories ; Time-series analysis |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-47&r=dge |
| By: | Kirill Borissov; Ram Sewak Dubey |
| Abstract: | We investigate the convergence property of the capital stock sequence in Ramsey equilibria with limited borrowing by the households. In our model, at the beginning of each period, households are allowed to borrow against their end of the period wage income. Under this assumption the capital stock sequence converges to the steady state stock irrespective of the technology and turnpike property holds in every Ramsey equilibrium. |
| Keywords: | Ramsey Equilibrium, Limited Borrowing, Convergence of capital path |
| JEL: | C61 D61 D90 O41 |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:eus:wpaper:ec0813&r=dge |
| By: | Yuliia Stupnytska (Center for Mathematical Economics, Bielefeld University; Center for Mathematical Economics, Bielefeld University) |
| Abstract: | This paper develops a search model with heterogeneous workers and social networks. High ability workers are more productive and have a larger number of professional contacts. Firms have a choice between a high cost vacancy in the regular labour market and a low cost job opening in the referral market. In this setting the model predicts that a larger number of social contacts is associated with a larger wage gap between high and low ability workers and a larger difference in the equilibrium unemployment rates. Next we demonstrate that the decentralized equilibrium is inefficient for any value of the bargaining power. There are two reasons for the inefficiency. First, the private gain from creating a job in the referral market is always below the social gain, so the equilibrium unemployment of high ability workers is above its optimal value. Moreover, high ability workers congest the market for low ability workers, so the equilibrium wage inequality is inefficiently large. This is in contrast to the result of Blazquez and Jansen (2008) showing that the distribution of wages is compressed in a search model with heterogeneous workers. Finally, we show that a combination of taxes and subsidies can restore the optimal allocation. |
| Keywords: | social capital, social networks, referrals, wage dispersion, wage compression |
| JEL: | J23 J31 J38 J64 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:491&r=dge |
| By: | Urban J. Jermann; Vivian Z. Yue |
| Abstract: | This paper studies firms' usage of interest rate swaps to manage risk in a model economy driven by aggregate productivity shocks, inflation shocks, and counter-cyclical idiosyncratic productivity risk. Consistent with empirical evidence, firms in the model are fixed-rate payers, and swap positions are negatively correlated with the term spread. In the model, swaps affect firms' investment decisions and debt pricing very moderately, and the availability of swaps generates only small economic gains for the typical firm. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1090&r=dge |
| By: | Edison G. Yu |
| Abstract: | This paper studies information aggregation in financial markets with recurrent investor exit and entry. I consider a dynamic general equilibrium model of asset trading with private information and collateral constraints. Investors differ in their aversion to Knightian uncertainty: When uncertainty is high, some investors exit the market. Since exiting investors' information is not fully revealed by prices, conditional return volatility and risk premia both increase. I use data on institutional investors' holdings of individual stocks to show that investor exits indeed move negatively with price in-formativeness. The model also implies that exit is more likely when wealth is more concentrated in the hands of less uncertainty-averse investors. The model thus predicts less informative prices toward the end of a long boom, as seen in the data. Moreover, economies with looser collateral constraints should see more volatility due to exit and partial revelation. Higher capital requirements can improve welfare by inducing more information revelation by prices. |
| Keywords: | Financial markets |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-42&r=dge |
| By: | Rendon, Silvio (Stony Brook University); Quella, Núria (Stony Brook University) |
| Abstract: | In this paper we analyze a mechanism that is particularly relevant to the workings of the Great Recession: we explain how easier home financing and higher homeownership rates increase unemployment rates. To this purpose we build a model of job search with liquid wealth accumulation and consumption of housing that can be rented, bought on credit, or sold. In our model, more relaxed house credit conditions increase workers' reservation wages, making them more selective in their job search. More selective job searches deteriorate employment transitions: job finding and job-to-job transitions rates decline while job loss rates increase, causing the overall unemployment rate to rise. We estimate this model structurally using NLSY data from 1978 until 2005. We find that more relaxed housing lending conditions, particularly lower downpayment requirements, increase unemployment rates by 6 percent points. We also find that declining labor demand decreases homeownership rates by 14 percent points. |
| Keywords: | job search, housing, savings, structural estimation |
| JEL: | J64 E21 E24 R21 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7773&r=dge |
| By: | Anna Zaharieva (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | This paper develops a labour market model with on-the-job search, match-specific productivity draws and an endogenous irreversible schooling decision. The choice of schooling is modelled as an optimal stopping problem which gives rise to the equilibrium heterogeneity of workers with respect to the formal education. The optimal schooling decision is characterized by the reservation productivity of students which is a monotonic function of time. Moreover, this reservation productivity is lower in expansions when job-to-job mobility is more intensive. Therefore, the model is compatible with the empirical evidence that expansions have a positive effect on the probability of a school dropout. The schooling density is downward-sloping and the equilibrium wage distribution is right-skewed with a unique interior mode. This means that the majority of workers earn wages in the middle range of the earnings distribution. At the same time there is a small proportion of employees in the beginning of their career with wages in the left tail of the earnings distribution and a small proportion of high-skilled workers earning wages in the right tail of the distribution. |
| Keywords: | Optimal schooling, uncertainty, on-the-job search, wage dispersion |
| JEL: | I21 I24 J62 J64 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:492&r=dge |
| By: | Mattia Guerini (Sant'Anna School of Advanced Studies, Pisa) |
| Abstract: | The recent economic crisis gave proof of the fact that the Taylor rule is no more that good instrument as it was thought to be just ten years ago; this might be due to the fact that agents acting in the economy hold Heterogeneous Expectations (HE). In a recent paper Anufriev et al. (2013) suggest that a way to force stability on the economic system is to adopt a more aggressive Taylor rule. In the present paper a standard NK-DSGE is considered in order to investigate whether a Friedman k-percent monetary policy rule may be a valid instrument to counteract the instability created by the presence of HE in a framework à la Brock and Hommes (1997). The model here presented suggests that when such a money supply rule is adopted by the Central Bank, stability strongly depends on the intensity of choice, which represents the ability of the agents to switch toward the best available predictor. |
| Keywords: | Heterogeneous Expectations, Friedman Monetary Policy Rule, Macroeconomic Stability |
| JEL: | E37 E52 E58 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def3&r=dge |
| By: | Levine, P.; Pearlman, J.; Yang, B. |
| Abstract: | This paper examines the implications of imperfect information (II) for optimal monetary policy with a consistent set of informational assumptions for the modeller and the private sector an assumption we term the informational consistency. We use an estimated simple NK model from Levine et al. (2012), where the assumption of symmetric II significantly improves the fit of the model to US data to assess the welfare costs of II under commitment, discretion and simple Taylor-type rules. Our main results are: first, common to all information sets we find significant welfare gains from commitment only with a zero-lower bound constraint on the interest rate. Second, optimized rules take the form of a price level rule, or something very close across all information cases. Third, the combination of limited information and a lack of commitment can be particularly serious for welfare. At the same time we find that II with lags introduces a ‘tying ones hands’ effect on the policymaker that may improve welfare under discretion. Finally, the impulse response functions under our most extreme imperfect information assumption (output and inflation observed with a two-quarter delay) exhibit hump-shaped behaviour and the fiscal multiplier is significantly enhanced in this case. |
| Keywords: | Imperfect Information; DSGE Model; Optimal Monetary Policy; Bayesian Estimation |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:13/13&r=dge |
| By: | Aleksandar Vasilev |
| Abstract: | Motivated by the highly-unionized public sectors, the high public shares in total em- ployment, and the public sector wage premia observed in Europe, this paper examines the importance of public sector unions for macroeconomic theory. The model gen- erates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly-unionized public sector, namely Germany during the period 1970-2007. The union model is a significant improvement over a model with exogenous public employment. In addition, endogenously-determined public wage and hours add to the distortionary effect of contractionary tax reforms by generating greater tax rate changes, thus producing significantly higher welfare losses. |
| Keywords: | fiscal policy, public wages, public employment, public sector labor unions |
| JEL: | C68 E62 J45 J51 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2013_19&r=dge |
| By: | Nicholas Lawson (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS) |
| Abstract: | A common finding of the optimal unemployment insurance literature is that the optimal UI replacement rate is around 50%, implying that current levels in the US are close to optimal. However, a key assumption in the existing literature is that unemployment benefits are the only government spending activity. In this paper I show that recommendations for optimal UI levels are dramatically reduced when one incorporates the fact that UI spending is a small part of overall government spending. This occurs because the negative impact of UI on income tax revenues implies added welfare costs, a mechanism that I refer to as a fiscal externality. Using both a calibrated structural job search model and a "sufficient statistics" method that relies on reduced-form elasticities, I find that the optimal replacement rate drops to zero once fiscal externalities are incorporated. However, I also consider the possibility that more generous UI could increase reservation wages and thus potentially increase the tax base, and I show that this second fiscal externality could have important effects on the results, with an optimal replacement rate which could rise above 70%. |
| Keywords: | unemployment insurance, fiscal externality, job search, sufficient statistics, government spending |
| Date: | 2013–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1357&r=dge |
| By: | Lutgen, Vanessa (IRES, Université catholique de Louvain); Van der Linden, Bruno (IRES, Université catholique de Louvain) |
| Abstract: | This paper studies equilibrium unemployment in a two-region economy where homogeneous workers and jobs are free to move and the housing market clears. Because of the Internet, searching for a job in another region without first migrating there is nowadays much simpler than in the past. Search-matching externalities are amplified by this possibility and by the fact that some workers can simultaneously receive a job offer from each region. The rest of the framework builds on Moretti (2011). We study numerically the impacts of various local shocks in a stylized US economy. Contrary to what could be expected, increasing matching effectiveness in the other region yields growing regional unemployment rates. We characterize the optimal allocation and conclude that the Hosios condition is not sufficient to restore efficiency. In the efficient allocation, the regional unemployment rates are much lower than in the decentralized economy and nobody searches in the other region. |
| Keywords: | matching, search then move, spatial equilibrium, regional economics, unemployment differentials |
| JEL: | J61 J64 R13 R23 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7763&r=dge |
| By: | Anna Sokolova (National Research University - Higher School of Economics, Myasnitskaya Street, 20, Moscow, Russia, 101000.) |
| Abstract: | In times of fiscal stress, governments fail to adjust fiscal policy in line with the requirements for debt sustainability. Under these circumstances, monetary policy impacts the probability of sovereign default alongside inflation dynamics. Uribe (2006) studies the relationship between inflation and sovereign defaults with a model in which the central bank controls a risky interest rate. He concludes that low inflation can only be maintained if the government sometimes defaults. This paper follows Uribe (2006) by examining monetary policy that controls a risky interest rate. However, it differs by the baseline assumption about the objectives of the central bank. In this paper, monetary policy is not pure inflation targeting: it is assumed that the central bank minimizes the probability of default under the upper restriction on inflation. An advantage of this framework is that it avoids the issue of zero risk premium, which exists in Uribe (2006), while at the same time allowing a study of the relationship between the constraints on monetary pol icy, the equilibrium default rate, and the risk premium. We show that monetary policy that controls the risky interest rate can mitigate default risks only when the upper limit on inflation is sufficiently high. The higher the agents believe the upper limit on inflation to be, the lower the equilibrium risk premium and probability of default are. Under a low default rate, constraints on inflation can only be fulfilled when fiscal shocks are either positive or small. |
| Keywords: | inflation, default, sovereign debt, monetary policy |
| JEL: | E61 E63 E52 F33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:39/ec/2013&r=dge |
| By: | Marina Azzimonti |
| Abstract: | We are motivated by four stylized facts computed for emerging and developed economies: (i) business cycle movements are wider in emerging countries; (ii) economies in emerging countries experience greater economic policy uncertainty; (iii) emerging economies are more polarized and less politically stable; and (iv) economic policy uncertainty is positively related to political polarization. We show that a standard real business cycle (RBC) model augmented to incorporate political polarization, a `polarized business cycle' (PBC) model, is consistent with these facts. Our main hypothesis is that fluctuations in economic variables are not only caused by innovations to productivity, as traditionally assumed in macroeconomic models, but also by shifts in political ideology. Switches between left-wing and right-wing governments generate uncertainty about the returns to private investment, and this affects real economic outcomes. Since emerging economies are more polarized than developed ones, the effects of political turnover are more pronounced. This translates into higher economic policy uncertainty and amplifies business cycles. We derive our results analytically by fully characterizing the long-run distribution of economic and fiscal variables. We then analyze the effect of a permanent increase in polarization on PBCs. |
| Keywords: | Business cycles ; Economic policy ; Uncertainty |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:13-44&r=dge |
| By: | Aleksandar Vasilev |
| Abstract: | This paper studies the wasteful effect of bureaucracy on the economy by addressing the link between rent-seeking behavior of government bureaucrats and the public sector wage bill, which is taken to represent the rent component. In particular, public officials are modeled as individuals competing for a larger share of those public funds. The rent-seeking extraction technology in the government administration is modeled as in Murphy et al. (1991) and incorporated in an otherwise standard Real-Business-Cycle (RBC) framework with public sector. The model is calibrated to German data for the period 1970-2007. The main findings are: (i) Due to the existence of a significant pub- lic sector wage premium and the high public sector employment, a substantial amount of working time is spent rent-seeking, which in turn leads to significant losses in terms of output; (ii) The measures for the rent-seeking cost obtained from the model for the major EU countries are highly-correlated to indices of bureaucratic inefficiency; (iii) Under the optimal fiscal policy regime,steady-state rent-seeking is smaller relative to the exogenous policy case, as the government chooses a higher public wage premium, but sets a much lower public employment, thus achieving a decrease in rent-seeking. |
| Keywords: | Rent-seeking, bureaucracy, public employment, government wages |
| JEL: | E69 E62 E32 J45 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2013_20&r=dge |
| By: | Naohisa Hirakata; Nao Sudo; Kozo Ueda |
| Abstract: | To explore the relative macroeconomic importance of financial intermediaries' (FIs’) net worth to that of non-financial firms (entrepreneurs), we extend the financial accelerator model of Bernanke, et al. (1999), such that both FIs’ and entrepreneurs rely on costly external debt. Our model, which is calibrated to the U.S. economy, highlights two features of the FIs’ net worth. First, the relative size of FIs' net worth as compared to entrepreneurial net worth, namely, the net- worth distribution in the economy, is important for the financial accelerator effect. Second, a shock to the FIs' net worth has greater aggregate impact than that to entrepreneurial net worth. The key reason for these findings is the low net worth of FIs’ in the United States. Our results imply that the ongoing regulatory reforms that protect banks' net worth from irrational exuberance or foster its accumulation are beneficial for macroeconomic stability. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:161&r=dge |
| By: | Gabriel Chodorow-Reich; Loukas Karabarbounis |
| Abstract: | The flow opportunity cost of moving from unemployment to employment consists of foregone public benefits and foregone utility from non-working time relative to consumption. Using detailed microdata, administrative data, and the structure of the search and matching model with concave and non-separable preferences, we document that the opportunity cost of employment is as procyclical as, and more volatile than, the marginal product of employment. The empirically-observed cyclicality of the opportunity cost implies that unemployment volatility in search and matching models of the labor market is far smaller than that observed in the data. This result holds irrespective of the level of the opportunity cost or whether wages are set by Nash bargaining or by an alternating-offer bargaining process. We conclude that appealing to aspects of labor supply does not help search and matching models explain aggregate employment fluctuations. |
| JEL: | E24 E32 J22 J64 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19678&r=dge |