Working Paper: NBER ID: w15801
Authors: Lawrence J. Christiano; Mathias Trabandt; Karl Walentin
Abstract: 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.
Keywords: Involuntary Unemployment; Business Cycle; Labor Market; Monetary Policy
JEL Codes: E02; E3; E5; J2; J6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unemployment (J64) | consumption (E21) |
| economic shocks (F69) | unemployment (J64) |
| economic shocks (F69) | labor force participation (J22) |
| unemployment (J64) | labor force participation (J22) |
| economic conditions (E66) | job search incentives (J68) |
| job search incentives (J68) | unemployment (J64) |
| economic conditions (E66) | unemployment (J64) |
| economic conditions (E66) | labor force participation (J22) |