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THE BUSINESS CYCLE WITH NOMINAL CONTRACTS AND SEARCH FRICTIONS

Published online by Cambridge University Press:  09 January 2018

Weh-Sol Moon*
Affiliation:
Seoul Women's University
*
Address correspondence to: Weh-Sol Moon, Department of Economics, Seoul Women's University, 621 Hwarangro, Nowon, 139-774 Seoul, Republic of Korea; e-mail: moon@swu.ac.kr.

Abstract

Macroeconomic models of the economy with rigid wage structures tend to predict unrealistically volatile labor hours and countercyclical productivity. This study extends the Cho–Cooley model by incorporating labor market frictions and efficient bargaining as an alternative contracting scheme in which contracts are forward-looking and specify labor hours and wage rates. By accounting for search frictions and realistic contractual schemes, the extended model overcomes two counterfactual predictions: (1) excess volatility of employment and output and (2) countercyclical productivity. However, the extended model fails to produce the Beveridge curve.

Type
Articles
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

I would like to thank the associate editor and two anonymous referees for their insightful comments. I also thank Jang-Ok Cho and Yoonsoo Lee for their helpful suggestions, and Murat Tasci for providing me with data. All remaining errors are my own. This work was supported by a special research grant from Seoul Womens University (2018).

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