Unemployment and Business Cycles

Abstract

IN THE MAIN TEXT we emphasize the role of wage inertia in helping our model account for labor market dynamics. The role of wage inertia in labor market dynamics is the subject of some controversy in the literature. For example, Hall (2005), Shimer (2005, and Hall and Milgrom (2008) argue that wage inertia is important. In contrast, Hagedorn and Manovskii (2008) and Ljungqvist and Sargent (2015) challenge that view. In this appendix we clarify the relationship between our findings and the literature.In the first two subsections we focus on the steady state response of labor market tightness to a change in steady state labor productivity, η Γ ϑ . We develop a decomposition of η Γ ϑ that isolates the role of wage inertia. In the first subsection we compare a model with extreme wage inertia (i.e., a constant wage) with a Nash bargaining model. In the second subsection we assess the role of wage inertia in the Nash and AOB models. We find that the value of η Γ ϑ is lower in the Nash model than it is in the AOB and constant wage models. Our decomposition indicates that this finding reflects the effects of wage inertia.The third section considers the relationship between steady state and dynamic analyses. There we show that steady state analysis can be very misleading for the dynamics of models like ours. There is no good substitute for analyzing dynamic impulse response functions in such models. A.1. The Potential for Wage Inertia to Resolve the Volatility PuzzleTo understand the role of wage inertia it is useful to consider the steady state of our model. The latter is characterized by a particular recursive structure. The capital-labor ratio and ϑ are determined by equations of the model that do not involve the labor market. Given ϑ, the steady state value of l is determined by the equations describing the labor market.The free entry condition and the bargaining equation, play a central role in the equilibrium conditions of the model. Making use of the relationship between the vacancy filling probability, Q, and market tightness, Γ , given by Q = σ m Γ −σ

Stepping on a Rake: the Fiscal Theory of Monetary Policy

“…Rotemberg and Woodford (1997) produce a negative sign. Christiano, Eichenbaum and Trabandt (2016) Medium-scale new-Keynesian models thus seem already to provide the desired negative sign, and the subsequent stepping on a rake rise, though the latter is frequently regarded as a bug not a feature. It seems that Sims just says that there is a fiscal-theoretic alternative; that one can produce roughly similar impulse-response functions from an active-fiscal / passive-money regime in an otherwise fairly standard new-Keynesian model.…”

What Students Learn in Economics 101: Time for a Change

“…and SAM (i.e. search and matching models)(Blanchard and Gali 2010, Christiano, Eichenbaum and Trabandt 2016, Gertler and Trigari 2009).…”

Long‐Run Inflation and the Distorting Effects of Sticky Wages and Technical Change

“…We do not include the automatic indexation of nonreset wages and prices to past and/or steady-state inflation that would make trend inflation and trend growth inflation irrelevant for equilibrium dynamics to a first-order approximation. This assumption has been questioned both on theoretical and empirical grounds (Woodford 2007, Cogley and Sbordone 2008, Chari, Kehoe, and McGrattan 2009, Christiano, Eichenbaum, and Trabandt 2016. Theoretically, it is not built from microeconomic foundations.…”

“…This could be done by assuming some forms of price and/or wage rigidities. Examples of this include Walsh (2005), who assume sticky prices in a relatively standard search and matching model to study inflation and output dynamics in response to monetary policy shocks, Gertler, Sala, and Trigari (2008) who use a staggered Nash wage bargaining deviceà la Calvo originally proposed by Gertler and Trigari (2009) to estimate a monetary DSGE model of labor market fluctuations, Arseneau and Chugh (2008) who assume a quadratic cost of adjusting nominal wages to study optimal fiscal and monetary policy, Thomas (2008) who focuses on multiperiod nominal wage bargaining to study the design of optimal monetary policy and more recently, Christiano, Eichenbaum, and Trabandt (2016) who show that the alternating wage bargaining scheme of Hall and Milgrom (2008) could stand as an alternative to Calvo nominal rigidities to explain the business-cycle properties of macroeconomic aggregates.…”