Can Cotract-Based Models Explain Business Cycles?
Author InfoPhaneuf, L. Abstract This Paper Questions the Capacity of the Two Leading Categories of Contract-Based Models of the Business Cycle to Give a Satisfactory Explanation for the Dynamic Behavior of Aggregates. Firstly, an Expected Market-Clearing Model That Is Designed to Account for the Dynamic Propagation of Shocks Is Unable to Produce a Situation of Prolonged Involuntary Unemployment Contrary to the Patterns of Persistence Observed Empirically in Unemployment Rate Series. Secondly, a Staggered Contracts Model with a Constant Nominal Wage over the Course of a Contract Generates Persistent Negative Effects of Demand Shocks on Output After a One-Period Lag When the Usual Arbitrary Restriction on the Information Available to Wage Setters Is Relaxed. Finally, When the Nominal Wage Is Allowed to Vary During a Contract the Staggered Contracts Model Is Unable to Produce Effects of Shocks That Last Longer Than the Contract Length As in the Original Expected Market-Clearing Models. Do
