Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 238: Involuntary Unemployment and the Business Cycle
Lawrence J. Christiano (), Mathias Trabrandt () and Karl Walentin ()
Additional contact information
Lawrence J. Christiano: Northwestern University, Postal: Department of Economics, 2001 Sheridan Road, Evanston, Illinois 60208, USA.
Mathias Trabrandt: European Central Bank, Postal: Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Karl Walentin: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Abstract: Can a model with limited labor market insurance explain standard macro- and labor market data jointly? We seek to construct a monetary model in which: i) the unemployed are worse off 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 New Keynesian framework with no capital. 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: DSGE; unemployment; labor force participation; business cycles; monetary policy; Bayesian estimation
JEL-codes: E20; E30; E50; J20; J60
69 pages, First version: April 1, 2010. Revised: June 1, 2012.
Full text files
rap_wp238_updated-120615.pdf
rap_wp238_technical_appendix_updated_120615.pdf
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