DP6063 Anticipated Growth and Business Cycles in Matching Models

Author(s): Wouter Den Haan, Georg Kaltenbrunner
Publication Date: January 2007
Keyword(s): labour force participation, Pigou cycles, productivity growth
JEL(s): E24, E32, J41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6063

Positive news about future productivity growth causes a contraction in most neoclassical business cycle models, which is counterfactual. We show that a business cycle model that incorporates the standard matching framework can generate an expansion. Although the wealth effect of an increase in expected productivity induces workers to reduce their labour supply, the matching friction has the opposite effect leaving labour supply roughly unaffected. Employment increases because the matching friction also induces firms to post more vacancies. This translates into additional resources, which makes it possible for both consumption and investment to increase in response to positive news about future productivity growth before the actual increase in productivity materializes.