Universidad de Valencia uv_anim.gif (52696 bytes)
Rafael Domenech xano.jpg (3336 bytes)


   March, 2006

Facultad de Economia, 46022 Valencia, Spain   

  Price Rigidity and the Volatility of Vacancies and Unemployment

Javier Andres, Rafael Doménech and Javier Ferri

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 four such additional mechanisms embedded in a full blown SDGE model. We find that price rigidity greatly improves the model's empirical performance making it capable of reproducing second moments of the data. Other components such as intertemporal substitution, endogenous match destruction, capital accumulation and distortionary taxes also play a relevant role.