Discussion paper

DP1206 Real Business Cycles with Involuntary Unemployment

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.


Galí, J (1995), ‘DP1206 Real Business Cycles with Involuntary Unemployment‘, CEPR Discussion Paper No. 1206. CEPR Press, Paris & London. https://cepr.org/publications/dp1206