Skip to main content
×
×
Home

THE BUSINESS CYCLE WITH NOMINAL CONTRACTS AND SEARCH FRICTIONS

  • Weh-Sol Moon (a1)
Abstract

Macroeconomic models of the economy with rigid wage structures tend to predict unrealistically volatile labor hours and countercyclical productivity. This study extends the Cho–Cooley model by incorporating labor market frictions and efficient bargaining as an alternative contracting scheme in which contracts are forward-looking and specify labor hours and wage rates. By accounting for search frictions and realistic contractual schemes, the extended model overcomes two counterfactual predictions: (1) excess volatility of employment and output and (2) countercyclical productivity. However, the extended model fails to produce the Beveridge curve.

Copyright
Corresponding author
Address correspondence to: Weh-Sol Moon, Department of Economics, Seoul Women's University, 621 Hwarangro, Nowon, 139-774 Seoul, Republic of Korea; e-mail: moon@swu.ac.kr.
Footnotes
Hide All

I would like to thank the associate editor and two anonymous referees for their insightful comments. I also thank Jang-Ok Cho and Yoonsoo Lee for their helpful suggestions, and Murat Tasci for providing me with data. All remaining errors are my own. This work was supported by a special research grant from Seoul Womens University (2018).

Footnotes
References
Hide All
Andolfatto, David (1996) Business cycles and labor-market search. American Economic Review 86, 112132.
Barnichon, Regis (2010) Building a composite help-wanted index. Economics Letters 109 (3), 175178.
Blanchard, Olivier J. and Fischer, Stanley (1989) Lectures on Macroeconomics. Cambridge, MA: MIT Press.
Blanchard, Olivier J. and Galí, Jordi (2010) Labor markets and monetary policy: A New Keynesian model with unemployment. American Economic Journal: Macroeconomics 2, 130.
Chang, Yongsung and Kim, Sun-Bin (2006) From individual to aggregate labor supply: A quantitative analysis based on a heterogeneous agent macroeconomy. International Economic Review 47, 127.
Cho, Jang-Ok (1993) Money and business cycle with one-period nominal contracts. Canadian Journal of Economics 26, 638659.
Cho, Jang-Ok and Cooley, Thomas F. (1995) The business cycle with nominal contracts. Economic Theory 6, 1333.
Cho, Jang-Ok, Cooley, Thomas F., and Phaneuf, Louis (1997) The welfare cost of nominal wage contracting. Review of Economic Studies 64, 465484.
Christoffel, Kai, Costain, James, de Walque, Gregory, Kuester, Keith, Linzert, Tobias, Millard, Stephen, and Pierrard, Olivier (2009) Wage Inflation and Employment Dynamics with Labour Market Matching. Documentos de trabajo 0918, Banco de España.
Christoffel, Kai and Kuester, Keith (2008) Resuscitating the wage channel in models with unemployment fluctuations. Journal of Monetary Economics 55, 865887.
Christoffel, Kai and Linzert, Tobias (2010) The role of real wage rigidity and labor market frictions for inflation persistence. Journal of Money, Credit and Banking, 42 (7), 14351446.
Cole, Harold L. and Rogerson, Richard (1999) Can the Mortensen–Pissarides matching model match the business-cycle facts? International Economic Review 40, 933959.
Cooley, Thomas F. and Hansen, Gary D. (1995) Money and the business cycle. In Cooley, T.F. (ed.), Frontiers of Business Cycle Research, pp. 175216. Princeton, NJ: Princeton University Press.
Cooley, Thomas F. and Quadrini, Vincenzo (1999) A neoclassical model of the Phillips curve relation. Journal of Monetary Economics 44, 165193.
Galí, Jordi (2010) Monetary policy and unemployment. In Friedman, Benjamin M. and Woodford, Michael (eds.), Handbook of Monetary Economics, pp. 487546. Amsterdam: Elsevier.
Galí, Jordi (2011) Unemployment Fluctuations and Stabilization Policies: A New Keynesian Perspective. Cambridge, MA: MIT Press.
Gertler, Mark, Sala, Luca, and Trigari, Antonella (2008) An estimated monetary DSGE model with unemployment and staggered nominal wage bargaining. Journal of Money, Credit and Banking 40, 17131764.
Gertler, Mark and Trigari, Antonella (2009) Unemployment fluctuations with staggered Nash wage bargaining. Journal of Political Economy 117, 3886.
Gottschalk, Peter (2005) Downward nominal-wage flexibility: Real or measurement error? Review of Economics and Statistics 87 (3), 556568.
Hagedorn, Marcus and Manovskii, Iourii (2008) The cyclical behavior of equilibrium unemployment and vacancies revisited. American Economic Review 98 (4), 16921706.
Hall, Robert E. (2005) Employment fluctuations with equilibrium wage stickiness. American Economic Review 95, 5065.
Janko, Zuzana (2008) Nominal wage contracts, labor adjustment costs and the business cycle. Review of Economic Dynamics 11, 434448.
Krause, Michael U., Lopez-Salido, David, and Lubik, Thomas A. (2008) Inflation dynamics with search frictions: A structural econometric analysis. Journal of Monetary Economics 55 (5), 892916.
Krause, Michael U. and Lubik, Thomas A. (2007) The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions. Journal of Monetary Economics 54, 706727.
Merz, Monika (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36, 269300.
Moon, Weh-Sol (2016) The business cycle with nominal contracts and search frictions. MPRA working paper No. 72666.
Mortensen, Dale T. and Pissarides, Christopher A. (1994) Job creation and job destruction in the theory of unemployment. Review of Economic Studies 61, 397415.
Shimer, Robert (2005) The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95, 2549.
Taylor, John B. (1999) Staggered price and wage setting in macroeconomics. In Taylor, John B. and Woodford, Michael (eds.), Handbook of Macroeconomics, pp. 10091050. Amsterdam: Elsevier.
Trigari, Antonella (2006) The Role of Search Frictions and Bargaining of Inflation Dynamics. IGIER working paper 304, Bocconi University.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed