Involuntary Unemployment and the Business Cycle

Lawrence J. Christiano, Mathias Trabandt, and Karl Walentin
CQER Working Paper 10-03
August 2010

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We propose a monetary model in which the unemployed satisfy the official U.S. definition of unemployment: people without jobs who are (1) currently making concrete efforts to find work and (2) willing and able to work. In addition, our model has the property that people searching for jobs are better off if they find a job than if they do not (that is, unemployment is involuntary). We integrate our model of involuntary unemployment into the simple new Keynesian framework with no capital and use the resulting model to discuss the concept of the nonaccelerating inflation rate of unemployment. We then integrate the model into a medium-sized DSGE model with capital and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to the three shocks.

JEL classification: E02, E3, E5, J2, J6

Key words: unemployment, job search, new Keynesian, nonaccelerating inflation rate of unemployment

The authors are grateful for the advice and comments of Gadi Barlevy, Marco Bassetto, Jeff Campbell, Martin Eichenbaum, Jonas Fisher, Jordi Gali, and Matthias Kehrig. They have also benefited from comments at the Journal of Economic Dynamics and Control Conference on Frontiers in Structural Macroeconomic Modeling: Thirty Years after "Macroeconomics and Reality" and Five Years after "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Hitotsubashi University, Tokyo, Japan, January 23, 2010. The views expressed here are the authors' and not necessarily those of the Executive Board of the European Central Bank, Sveriges Riksbank, the Federal Reserve Bank of Atlanta, or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Lawrence J. Christiano, Department of Economics, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, and NBER, 847-491-8231,; Mathias Trabandt, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany, and Sveriges Riksbank, 49-69-1344-6321,; or Karl Walentin, Sveriges Riksbank, 103 37 Stockholm, Sweden, 46-8-787-0491,

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