Shooting the Auctioneer

Roger Farmer

No 4825, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Most dynamic stochastic general equilibrium models (DSGE) of the macroeconomy assume that labour is traded in a spot market. Two exceptions (Andolfatto [3], Merz [11]) combine the two-sided search model of Mortenson and Pissarides, [14], [13], [15] 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 a suggestion by Hall, [4] [5], building on work by Shimer [18], 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 I simulate moments of an artificial economy with and without sticky wages. I compute the welfare costs of the sticky wage equilibrium and find them to be small.

JEL-codes: E24 E32 J63 J64 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-cmp and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Working Paper: Shooting the Auctioneer (2006)
Working Paper: Shooting the Auctioneer (2005)
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