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Shooting the Auctioneer

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  • Roger E. A. Farmer
  • Andrew Hollenhorst

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.

Suggested Citation

  • Roger E. A. Farmer & Andrew Hollenhorst, 2006. "Shooting the Auctioneer," NBER Working Papers 12584, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12584
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    References listed on IDEAS

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    1. Richard Rogerson & Robert Shimer & Randall Wright, 2004. "Search-Theoretic Models of the Labor Market-A Survey," NBER Working Papers 10655, National Bureau of Economic Research, Inc.
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    4. Robert E. Hall, 2006. "The labor market and macro volatility: a nonstationary general-equilibrium analysis," Proceedings, Federal Reserve Bank of San Francisco.
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    Cited by:

    1. Richard Rogerson & Lodewijk P. Visschers & Randall Wright, 2009. "Labor market fluctuations in the small and in the large," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 125-137, March.
    2. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    3. repec:zbw:bofrdp:2009_015 is not listed on IDEAS
    4. Burcu Eyigungor, 2010. "Specific Capital and Vintage Effects on the Dynamics of Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 100(3), pages 1214-1237, June.
    5. Cheremukhin, Anton A. & Restrepo-Echavarria, Paulina, 2014. "The labor wedge as a matching friction," European Economic Review, Elsevier, vol. 68(C), pages 71-92.
    6. Ryan Chahrour & Sanjay K. Chugh & Tristan Potter, 2014. "Searching for Wages in an Estimated Labor Matching Model," Boston College Working Papers in Economics 867, Boston College Department of Economics, revised 20 Dec 2016.
    7. Berentsen, Aleksander & Menzio, Guido & Wright, Randall D., 2007. "Inflation and Unemployment: Lagos-Wright meets Mortensen-Pissarides," Kiel Working Papers 1334, Kiel Institute for the World Economy (IfW Kiel).
    8. Gabriele Cardullo, 2010. "Matching Models Under Scrutiny: An Appraisal Of The Shimer Puzzle," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 622-656, September.
    9. Haefke, Christian & Sonntag, Marcus & van Rens, Thijs, 2013. "Wage rigidity and job creation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 887-899.
    10. Berger, Johannes & Strohner, Ludwig, 2020. "Documentation of the PUblic Policy Model for Austria and other European countries (PUMA)," Research Papers 11, EcoAustria – Institute for Economic Research.
    11. Aleksander Berentsen & Guido Menzio & Randall Wright, 2011. "Inflation and Unemployment in the Long Run," American Economic Review, American Economic Association, vol. 101(1), pages 371-398, February.
    12. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
    13. Harashima, Taiji, 2009. "Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path," MPRA Paper 18953, University Library of Munich, Germany.
    14. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, March.
    15. W D A Bryant, 2009. "General Equilibrium:Theory and Evidence," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6875, August.
    16. Farmer, Roger, 2009. "Fiscal Policy Can Reduce Unemployment: But There is a Better Alternative," CEPR Discussion Papers 7526, C.E.P.R. Discussion Papers.
    17. Kilponen, Juha & Vanhala, Juuso, 2009. "Productivity and job flows: heterogeneity of new hires and continuing jobs in the business cycle," Bank of Finland Research Discussion Papers 15/2009, Bank of Finland.
    18. Anton Cheremukhin, 2010. "Labor Matching Model: Putting the Pieces Together," 2010 Meeting Papers 260, Society for Economic Dynamics.
    19. Anton A. Cheremukhin, 2011. "Labor matching: putting the pieces together," Working Papers 1102, Federal Reserve Bank of Dallas.
    20. Garey Ramey, 2008. "Exogenous vs. Endogenous Separation," 2008 Meeting Papers 466, Society for Economic Dynamics.
    21. Veracierto, Marcelo, 2008. "On the cyclical behavior of employment, unemployment and labor force participation," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1143-1157, September.
    22. Harashima, Taiji, 2011. "A Mechanism of Cyclical Volatility in the Vacancy-Unemployment Ratio: What Is the Source of Rigidity?," MPRA Paper 32476, University Library of Munich, Germany.
    23. Farmer, Roger E.A., 2010. "How to reduce unemployment: A new policy proposal," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 557-572, July.
    24. Ramey, Garey, 2008. "Exogenous vs. Endogenous Separation," University of California at San Diego, Economics Working Paper Series qt0qb196qd, Department of Economics, UC San Diego.
    25. Kilponen, Juha & Vanhala, Juuso, 2009. "Productivity and job flows: heterogeneity of new hires and continuing jobs in the business cycle," Working Paper Series 1080, European Central Bank.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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