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Macroeconomic fluctuations and bargaining

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  • Ennis, H.M.Huberto M.

Abstract

I study the limit rule for bilateral bargaining when agents recognize that the aggregate economy (influencing the match surplus) follows a dynamic process that randomly switches back and forth between a finite number of possible states. The rule derived in this paper is of special importance for decentralized exchange economies with bargaining. Two simple applications are presented to illustrate this fact. The first example is a model of wage bargaining and trade externalities. I show that in those situations sophisticated bargaining tends to increase the volatility (due to extrinsic uncertainty) of the wage bill. The second example is based on the Kiyotaki-Wright model of money. I explain how equilibrium prices depend in a fundamental way on the dynamic bargaining solution.
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  • Ennis, H.M.Huberto M., 2004. "Macroeconomic fluctuations and bargaining," Journal of Economic Theory, Elsevier, vol. 115(2), pages 322-340, April.
    • Handle: RePEc:eee:jetheo:v:115:y:2004:i:2:p:322-340
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
    3. Coles, Melvyn G. & Wright, Randall, 1998. "A Dynamic Equilibrium Model of Search, Bargaining, and Money," Journal of Economic Theory, Elsevier, vol. 78(1), pages 32-54, January.
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    6. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-141, February.
    7. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
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    11. Wright Randall, 1994. "A Note on Sunspot Equilibria in Search Models of Fiat Money," Journal of Economic Theory, Elsevier, vol. 64(1), pages 234-241, October.
    12. Drazen, Allan, 1988. "Self-fulfilling Optimism in a Trade-Friction Model of the Business Cycle," American Economic Review, American Economic Association, vol. 78(2), pages 369-372, May.
    13. Mortensen, Dale T, 1999. "Equilibrium Unemployment Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 889-914, November.
    14. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-1150, September.
    15. Coles, Melvyn G. & Muthoo, Abhinay, 2003. "Bargaining in a non-stationary environment," Journal of Economic Theory, Elsevier, vol. 109(1), pages 70-89, March.
    16. Ennis, Huberto M., 2001. "On Random Matching, Monetary Equilibria, And Sunspots," Macroeconomic Dynamics, Cambridge University Press, vol. 5(1), pages 132-142, February.
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    Cited by:

    1. Trejos, Alberto & Wright, Randall, 2016. "Search-based models of money and finance: An integrated approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 10-31.
    2. Alexei Deviatov & Igor Dodonov, 2006. "Exchange-rate volatility, exchange-rate disconnect, and the failure of volatility conservation," Working Papers w0079, Center for Economic and Financial Research (CEFIR).
    3. Rocheteau, Guillaume & Wang, Lu, 2023. "Endogenous liquidity and volatility," Journal of Economic Theory, Elsevier, vol. 210(C).

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