Get access

BUSINESS CYCLES IN THE EQUILIBRIUM MODEL OF LABOR MARKET SEARCH AND SELF-INSURANCE

Authors

  • Makoto Nakajima

    1. Federal Reserve Bank of Philadelphia, U.S.A.
    Search for more papers by this author
    • I thank Randall Wright, José-Víctor Ríos-Rull, Iourii Manovskii, Satyajit Chatterjee, Keith Kuester, Shigeru Fujita, James M. Nason, two anonymous referees, and the seminar participants at the 2006 International Conference on Computational Economics and Finance, 2006 Far Eastern Meeting of the Econometric Society, 2007 North American Winter Meeting of the Econometric Society, the Bank of Canada, USC Marshall, Purdue University, University of Pennsylvania, the Federal Reserve Bank of Philadelphia, and the 2008 Midwest Macro Meeting for their comments and suggestions. The views expressed here are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. Please address correspondence to: Makoto Nakajima, Research Department, Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106. Phone: 215 574 3905. Fax: 215 574 4303. E-mail: makoto.nakajima@phil.frb.org.


  • Manuscript received March 2008; revised August 2010.

Abstract

I introduce risk-aversion, labor-leisure choice, capital, individual productivity shocks, and market incompleteness to the standard model of labor search and matching and investigate the model’s cyclical properties. I find that the model can generate the observed large volatility of unemployment and vacancies with a reasonable replacement rate of unemployment insurance benefits of 64%. Labor-leisure choice plays a crucial role through additional utility from leisure when unemployed and further amplification from adjustments of hours worked. On the other hand, the borrowing constraint or individual productivity shocks do not significantly affect the cyclical properties of unemployment and vacancies.

Get access to the full text of this article

Ancillary