Can Cotract-Based Models Explain Business Cycles?

L. Phaneuf

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: This Paper Questions the Capacity of the Two Leading Categories of Contract-Based Models of the Business Cycle to Give a Satisfactory Explanation for the Dynamic Behavior of Aggregates. Firstly, an Expected Market-Clearing Model That Is Designed to Account for the Dynamic Propagation of Shocks Is Unable to Produce a Situation of Prolonged Involuntary Unemployment Contrary to the Patterns of Persistence Observed Empirically in Unemployment Rate Series. Secondly, a Staggered Contracts Model with a Constant Nominal Wage over the Course of a Contract Generates Persistent Negative Effects of Demand Shocks on Output After a One-Period Lag When the Usual Arbitrary Restriction on the Information Available to Wage Setters Is Relaxed. Finally, When the Nominal Wage Is Allowed to Vary During a Contract the Staggered Contracts Model Is Unable to Produce Effects of Shocks That Last Longer Than the Contract Length As in the Original Expected Market-Clearing Models.

Keywords: Contracts; Models; Wages (search for similar items in EconPapers)
Pages: 25P. pages
Date: 1987
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:8727

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