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Involuntary Unemployment and the Business Cycle

Lawrence J. Christiano, Mathias Trabandt, Karl Walentin

NBER Working Paper No. 15801
Issued in March 2010, Revised in December 2019
NBER Program(s):Economic Fluctuations and Growth

Can a model with limited labor market insurance explain standard macro and labor market data jointly? We construct a monetary model in which: i) the unemployed are worse o§ than the employed, i.e. unemployment is involuntary and ii) the labor force participation rate varies with the business cycle. To illustrate key features of our model, we start with the simplest possible framework. We then integrate the model into a medium-sized DSGE model and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to these three shocks.

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Document Object Identifier (DOI): 10.3386/w15801

Published: Lawrence J. Christiano & Mathias Trabandt & Karl Walentin, 2020. "Involuntary unemployment and the business cycle," Review of Economic Dynamics, .

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