Business cycle models with labour market frictions: the role of the matching function

Ruthira Naraidoo and Juan Paez-Farrell

No 2025006, Working Papers from The University of Sheffield, Department of Economics

Abstract: Standard business cycle models with search and matching frictions in the labour market increasingly rely on the assumption that firms face hiring, as opposed to, search costs in recruiting workers. We show that although this modification im-proves the model’s empirical performance, it causes the matching function to play no role in macroeconomic dynamics. Assuming both costs can overcome this short-coming but for reasonable parameter values it implies that matching efficiency shocks have no effects.

Keywords: DSGE models; Labour market; search and matching; unemployment; hiring costs (search for similar items in EconPapers)
JEL-codes: C52 E32 J64 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2025-07
New Economics Papers: this item is included in nep-dge and nep-lab
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