The Consumption-Tightness Puzzle

Morten Ravn

No 12421, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper introduces a labor force participation choice into a labor market matching model embedded in a dynamic stochastic general equilibrium set-up with production and savings. The participation choice is modelled as a tradeoff between forgoing the expected benefits of being search active and engaging in costly labor market search. The model induces a symmetry in firms' and workers' search decision since both sides of the labor market vary search effort at the extensive margins. We show that this set-up is of considerable analytical convenience and that it gives rise to a linear relationship between labor market tightness and the marginal utility of consumption. We refer to the latter as the "consumption - tightness puzzle" because (a) it gives rise to a number of counterfactual implications, and (b) it is a robust implication of theory. Amongst the counterfactual implications are very low volatility of tightness, procyclical unemployment, and a positively sloped Beveridge curve. These implications all derive from procyclical variations in participation rates that follow from allowing for the extensive search margin.

JEL-codes: E24 E32 J20 J41 J64 (search for similar items in EconPapers)
Date: 2006-08
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Published as The Consumption-Tightness Puzzle , Morten O. Ravn. in NBER International Seminar on Macroeconomics 2006 , Reichlin and West. 2008

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Related works:
Chapter: The Consumption-Tightness Puzzle (2008)
Working Paper: The Consumption-Tightness Puzzle (2006)
Working Paper: The Consumption-Tightness Puzzle (2006)
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