Involuntary unemployment and the business cycle

Lawrence J. Christiano*, Mathias Trabandt, Karl Walentin

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Scopus citations


Can a model with limited labor market insurance explain standard macro and labor market data jointly? We construct a monetary model in which: i) the unemployed are worse off than the employed, i.e. unemployment is involuntary and ii) the labor force participation rate varies with the business cycle. To illustrate key features of our model, we start with the simplest possible framework. We then integrate the model into a medium-sized DSGE model and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to these three shocks.

Original languageEnglish (US)
Pages (from-to)26-54
Number of pages29
JournalReview of Economic Dynamics
StatePublished - Jan 2021


  • Bayesian estimation
  • Business cycles
  • DSGE
  • Labor force participation
  • Monetary policy
  • Unemployment

ASJC Scopus subject areas

  • Economics and Econometrics


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