NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Unemployment and Business Cycles

Lawrence J. Christiano, Martin S. Eichenbaum, Mathias Trabandt

NBER Working Paper No. 19265
Issued in August 2013
NBER Program(s):   EFG   ME

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.

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Document Object Identifier (DOI): 10.3386/w19265

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