A non-Walrasian labor market in a monetary model of the business cycle. (English) Zbl 1163.91465

Summary: This paper investigates to what extent a new Keynesian, monetary model with the addition of a microfounded, non-Walrasian labor market solely based on union bargaining is able to replicate key aspects of the business cycle. The presence of a representative union offers an explanation for two features of the cycle. First, it generates an endogenous mechanism which produces persistent responses to both supply and demand shocks. Second, labor unionization reduces the elasticity of marginal costs to output. This leads to lower inflation volatility. Model simulations show that the unionized framework can better reproduce European business cycle data than can a model with a competitive labor market.


91B50 General equilibrium theory
91B40 Labor market, contracts (MSC2010)
91B62 Economic growth models
Full Text: DOI


[1] Alexopoulos, M., 2002. Unemployment in a monetary business cycle model. University of Toronto Working Paper. · Zbl 1163.91505
[2] Alexopoulos, M., Unemployment and the business cycle, Journal of monetary economics, 51, 277-298, (2004)
[3] Ball, R.; Romer, R., Real rigidities and the non-neutrality of money, The review of economic studies, 57, 183-203, (1990)
[4] Bernanke, B.; Gertler, M., Inside the black box: the credit channel of monetary policy transmission, Journal of economic perspectives, 9, 24-48, (1995)
[5] Bernanke, B.; Mihov, I., Measuring monetary policy, Quarterly journal of economics, 113, 869-902, (1998)
[6] Bils, M.; Klenow, P., Some evidence on the importance of price stickiness, Journal of political economy, 112, 947-985, (2004)
[7] Blanchard, O.; Kahn, C., The solution of linear difference models under rational expectation, Econometrica, 48, 1305-1311, (1980) · Zbl 0438.90022
[8] Boivin, J., Giannoni, M., 2005. Has monetary economics become more effective?. The Review of Economics and Statistics, forthcoming.
[9] Carlstrom, C., Fuerst, T., 2000. Forward vs. backward-looking Taylor rules. Federal Reserve Bank of Cleveland Working Paper No. 9.
[10] Chari, V.; Kehoe, P.; McGrattan, E., Sticky price models of the business cycle: can the contract multiplier solve the persistence problem, Econometrica, 68, 1151-1579, (2000)
[11] Cheron, A.; Langot, F., The Phillips and beveridge curves revisited, Economics letters, 69, 371-376, (2000) · Zbl 0956.91046
[12] Cheron, A.; Langot, F., Labor market search and real business cycles: reconciling Nash bargaining with the real wage dynamics, Review of economic dynamics, 7, 476-493, (2004)
[13] Christiano, L.; Eichenbaum, M.; Evans, C., Sticky prices and limited participation models: a comparison, European economic review, 41, 1201-1249, (1997)
[14] Christiano, L., Eichenbaum, M., Vigfusson, R., 2004. What happens after a technology shock?. Northwestern University Working Paper.
[15] Christoffel, K., Linzert, T., 2005. The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics. IZA Discussion Paper No. 1896.
[16] Clarida, R.; Galì, J.; Gertler, M., Monetary policy rules in practice: some international evidence, European economic review, 42, 1033-1067, (1998)
[17] Cole, H.; Rogerson, R., Can the mortensen – pissarides matching model match the business-cycle facts?, International economic review, 40, 933-959, (1999)
[18] Danthine, J.P.; Kurmann, A., Fair wages in a new Keynesian model of the business cycle, Review of economic dynamics, 7, 107-142, (2004)
[19] Dotsey, M., King, R., 2005. Pricing, production and persistence. Boston University Working Paper.
[20] Erceg, C.; Henderson, D.; Levin, A., Optimal monetary policy with staggered wage and price contracts, Journal of monetary economics, 46, 281-313, (2000)
[21] Fagan, G., Henry, J., Mestre, R., 2001. An area wide model (AWM) for the Euro area. European Central Bank Working Paper Series No. 42.
[22] Farber, H., 1986. The analysis of union behaviour. In: Ashenfelter, O., Layard, R. (Eds.), Handbook of Labor Economics, vol. II. North-Holland, Amsterdam.
[23] Francis, N., Ramey, V., 2005. Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited, Journal of Monetary Economics 52, 1379-1399.
[24] French, E., The labor supply response to (mismeasured but) predictable wage changes, The review of economics and statistics, 86, 602-613, (2004)
[25] Gahan, P., (what) do unions maximise? evidence from survey data, Cambridge journal of economics, 26, 279-297, (2002)
[26] Galì, J., Technology, employment, and the business cycle: do technology shocks explain aggregate fluctuations?, American economic review, 89, 249-271, (1999)
[27] Galì, J.; Gertler, M., Inflation dynamics: a structural econometric analysis, Journal of monetary economics, 44, 195-222, (1999)
[28] Galì, J.; Gertler, M.; Lopez-Salido, D., European inflation dynamics, European economic review, 45, 1237-1270, (2001)
[29] Hall, R., 2000. Labor market frictions and unemployment fluctuations. In: Woodford, M., Taylor, J. (Eds.), Handbook of Macroeconomics, vol. IB. Elsevier, Amsterdam, New York.
[30] Ireland, P., Interest rates, inflation, and federal reserve policy Since 1980, Journal of money, credit, and banking, 32, 417-434, (2000)
[31] King, R., Rebelo, S., 2000. Resuscitating real business cycle. In: Woodford, M., Taylor, J. (Eds.), Handbook of Macroeconomics, vol. IB. Elsevier, Amsterdam, New York.
[32] Klein, P., Using the generalized Schur form to solve a multivariate linear rational expectations model, Journal of economic dynamics and control, 24, 1405-1423, (2000) · Zbl 0968.91027
[33] Krause, M., Lubik, T., 2005. The (ir)relevance of real wage rigidity in the new Keynesian model with search frictions. Journal of Monetary Economics, forthcoming.
[34] Maffezzoli, M., Non-Walrasian labor markets and real business cycles, Review of economic dynamics, 4, 860-892, (2001)
[35] Merz, M., Search in the labor market and the real business cycle, Journal of monetary economics, 36, 269-300, (1995)
[36] Mortensen, D.; Pissarides, C., Job creation and job destruction in the theory of unemployment, The review of economic studies, 61, 397-415, (1994) · Zbl 0800.90319
[37] Nickell, S., 1982. A bargaining model of the Phillips curve. Center for Labor Economics Discussion Paper No. 130.
[38] OECD, 1997. Employment Outlook.
[39] OECD, 2002. Economic Outlook.
[40] Pencavel, J., 1986. Labor supply of men: a survey. In: Ashenfelter, O., Layard, R. (Eds.), Handbook of Labor Economics, vol. I. North-Holland, Amsterdam.
[41] Pissarides, C., The impact of employment tax cut on unemployment and wages: the role of unemployment benefits and tax structure, European economic review, 42, 155-183, (1998)
[42] Rogerson, R.; Wright, R., Involuntary unemployment in economics with efficient risk sharing, Journal of monetary economics, 22, 501-515, (1988)
[43] Rotemberg, J., Monopolistic price adjustment and aggregate output, The review of economic studies, 49, 517-531, (1982) · Zbl 0489.90022
[44] Rotemberg, J.; Woodford, M., Oligopolistic pricing and the effects of aggregate demand on economic activity, Journal of political economy, 100, 1153-1207, (1992)
[45] Sbordone, A., Prices and unit labor costs: a new test of price stickiness, Journal of monetary economics, 49, 265-292, (2002)
[46] Smets, F.; Wouters, R., An estimated stochastic dynamics general equilibrium model of the euro area, Journal of the European economic association, 5, 1123-1175, (2003)
[47] Trigari, A., 2005. Equilibrium unemployment, job flows and inflation dynamics. Bocconi University Working Paper No. 268.
[48] Trigari, A., 2006. The role of search frictions and bargaining for inflation dynamics. Bocconi University Working Paper No. 304.
[49] Walsh, C., Labor market search, sticky prices, and interest rate policies, Review of economic dynamics, 8, 829-849, (2005)
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.