A Plucking Model of Business Cycles

Stéphane Dupraz, Emi Nakamura and Jon Steinsson

No 26351, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In standard models, economic activity fluctuates symmetrically around a “natural rate” and stabilization policies can dampen these fluctuations but do not affect the average level of activity. An alternative view—labeled the “plucking model” by Milton Friedman—is that economic fluctuations are drops below the economy’s full potential ceiling. We show that the dynamics of the unemployment rate in the US display a striking asymmetry that strongly favors the plucking model: increases in unemployment are followed by decreases of similar amplitude, while the amplitude of the increase is not related to the amplitude of the previous decrease. We develop a microfounded plucking model of the business cycle. In our model, the plucking asymmetry results from downward nominal wage rigidity, which we rationalize using a search model. Our model also matches the fact that unemployment rises much faster during recessions than it falls during expansions. In our plucking model, stabilization policy lowers average unemployment and thereby yields sizable welfare gains.

JEL-codes: E24 E32 E52 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (61)

Downloads: (external link)
http://www.nber.org/papers/w26351.pdf (application/pdf)

Related works:
Working Paper: A Plucking Model of Business Cycles (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:26351

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w26351

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().