NATIONAL BUREAU OF ECONOMIC RESEARCH
Department of Economics UCLA
8283 Bunche Hall: Box 951477
Los Angeles CA 90095-1477
NBER Working Papers and Publications
|October 2006||Shooting the Auctioneer|
with Roger E. A. Farmer: w12584
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 d...