TY  - JOUR
AU  - Farmer,Roger E. A.
AU  - Hollenhorst,Andrew
TI  - Shooting the Auctioneer
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12584
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12584
L1  - http://www.nber.org/papers/w12584.pdf
N1  - Author contact info:
Roger Farmer
UCLA
Department of Economics
Box 951477
Los Angeles, CA 90095-1477
Tel: 310/825-6547
Fax: 310/825-9528
E-Mail: rfarmer@econ.ucla.edu

Andrew Hollenhorst
Department of Economics UCLA
8283 Bunche Hall: Box 951477
Los Angeles CA 90095-1477
E-Mail: ahollen@ucla.edu
M3  - presented at "SI 2005 EFG Working Group (EFRSW)", July 18-22, 2005
AB  - Most dynamic stochastic general equilibrium models of the macroeconomy assume that labor is traded in a spot market. Two exceptions by David Andolfatto and Monika Merz combine a two-sided search model with a one-sector real business cycle model. These hybrid models are successful, in some dimensions, but they cannot account for observed volatility in unemployment and vacancies.  Following suggestions by Robert Hall and Robert Shimer, this paper shows that a relatively standard DSGE model with sticky wages can account for these facts. Using a second-order approximation to the policy function we simulate moments of an artificial economy with and without sticky wages and we document the dependence of unemployment and vacancy volatility on two key parameters; the disutility of effort and the degree of wage stickiness. We compute the welfare costs of the sticky wage equilibrium and find them to be small.
ER  -