PriceRigidityandtheVolatilityofVacanciesand.PDFVIP

Price Rigidity and the Volatility of Vacancies and Unemployment Javier Andrés, Rafael Doménech and Javier Ferri Universidad de Valencia This version, February, 2011 Abstract The successful matching model developed by Mortensen and Pissarides seems to find its hardest task in explaining the cyclical movements of some key labor market variables such as the vacancy rate and the vacancy-unemployment ratio. Several authors have discussed mechanisms compatible with the matching technology that are able to deliver the kind of correlations observed in the data. In this paper we explore the contribution of price rigidity, within the framework of a full-blown SDGE model, to explain the dynamics of these variables. We find that price rigidity greatly im- proves the empirical performance of the model, making it capable of reproducing second moments of the data, in particular those related to the vacancy rate and market tightness. Other realistic fea- tures of these models, such as intertemporal substitution, endogenous match destruction and capital accumulation, do not seem to play a relevant role in a flexible price setting. Keywords: unemployment, vacancies, business cycle, price rigidities JEL Classification: E24, E32, J64. 1. Introduction The Mortensen and Pissarides model provides an engaging explanation of the determi- nants of unemployment dynamics (see Mortensen and Pissarides, 1999, and the references therein). While the model has gained widespread acceptance as a theory of the Natural We appreciate the comments by participants at the 21st Annual Congress of the European Economic Asso- ciation in Viena, the 31st Simposio de Analisis Económico, the 39th Konstanz Seminar, seminars at FEDEA and Universidad Carlos III (Madrid), the Annual Conferenc