DP1206 Real Business Cycles with Involuntary Unemployment

Author(s): Jordi Galí
Publication Date: June 1995
Keyword(s): Endogenous Mark-ups, Insider-Outsider Models, Real Business Cycles, Unemployment
JEL(s): E32, J64
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1206

We develop and analyse a real business cycle model in which both goods and labour markets are characterized by imperfect competition. In equilibrium, unemployment emerges as the result of the market power exercised by insiders at the firm level. We show that a calibrated version of the model is capable of generating both a procyclical labour supply and a countercyclical unemployment rate, in a way qualitatively consistent with US data.