Shooting the Auctioneer

Roger Farmer and Andrew Hollenhorst

No 12584, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Most dynamic stochastic general equilibrium models of the macroeconomy assume that labor is traded in a spot market. Two exceptions by David Andolfatto and Monika Merz combine a two-sided search model with a one-sector real business cycle model. These hybrid models are successful, in some dimensions, but they cannot account for observed volatility in unemployment and vacancies. Following suggestions by Robert Hall and Robert Shimer, this paper shows that a relatively standard DSGE model with sticky wages can account for these facts. Using a second-order approximation to the policy function we simulate moments of an artificial economy with and without sticky wages and we document the dependence of unemployment and vacancy volatility on two key parameters; the disutility of effort and the degree of wage stickiness. We compute the welfare costs of the sticky wage equilibrium and find them to be small.

JEL-codes: E32 J6 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Note: EFG
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Citations: View citations in EconPapers (28)

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Related works:
Working Paper: Shooting the Auctioneer (2005)
Working Paper: Shooting the Auctioneer (2005)
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