Paper #872

Title:

Business cycles, unemployment insurance and the calibration of matching models

Authors:

James S. Costain and Michael Reiter

Date:

June 2003 (Revised: October 2006)

Abstract:

This paper theoretically and empirically documents a puzzle that arises when an RBC economy with a job matching function is used to model unemployment. The standard model can generate sufficiently large cyclical fluctuations in unemployment, or a sufficiently small response of unemployment to labor market policies, but it cannot do both. Variable search and separation, finite UI benefit duration, efficiency wages, and capital all fail to resolve this puzzle. However, either sticky wages or match-specific productivity shocks can improve the model's performance by making the firm's flow of surplus more procyclical, which makes hiring more procyclical too.

Keywords:

Real business cycles, matching function, unemployment insurance

JEL codes:

C78, E24, E32, I38, J64

Area of Research:

Macroeconomics and International Economics

Download the paper in PDF format