Following Farmer’s (2008a-b, 2010) micro-foundation of the General Theory, I build a competitive search model in which output and employment are demand-driven, prices are flexible, the nominal wage is used as numeraire and agents are divided in two categories: wage and profit earners. Within this framework, I show that the model economy has a continuum of demand constrained equilibria that might be consistent with a certain degree of endogenous real wage stickiness. Moreover, calibrating and simulating the model economy in order to fit the US first-moments data, I show that this setting can provide a rationale for Shimer’s (2005) puzzle, i.e., the relative stability of real wages in spite of the large volatility of labor market tightness.
Stochastic Dynamics and Matching in the Old Keynesian Economics: A Rationale for the Shimer's Puzzle
GUERRAZZI, MARCO
2010-01-01
Abstract
Following Farmer’s (2008a-b, 2010) micro-foundation of the General Theory, I build a competitive search model in which output and employment are demand-driven, prices are flexible, the nominal wage is used as numeraire and agents are divided in two categories: wage and profit earners. Within this framework, I show that the model economy has a continuum of demand constrained equilibria that might be consistent with a certain degree of endogenous real wage stickiness. Moreover, calibrating and simulating the model economy in order to fit the US first-moments data, I show that this setting can provide a rationale for Shimer’s (2005) puzzle, i.e., the relative stability of real wages in spite of the large volatility of labor market tightness.
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