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LIMITED PARTICIPATION, LABOR MARKET SEARCH AND LIQUIDITY EFFECTS

Published online by Cambridge University Press:  14 January 2010

Yan Li
Yan Li*
Affiliation:
University of Wisconsin—Eau Claire
*
Address correspondence to: Yan Li, Department of Economics, University of Wisconsin—Eau Claire, 105 Garfield Ave., P.O. Box 4004, Eau Claire, WI 54702, USA; e-mail: [email protected].
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Abstract

This paper models the liquidity effects after a contractionary open market operation in a framework that highlights the frictions of limited participation in financial markets and search frictions in labor markets. It is shown that Lucas rigidities, with the aid of labor market rigidities, could generate more persistent liquidity effects even in a context of flexible prices. In addition, the simulation results show that this adapted liquidity and labor search model does a reasonable good job in explaining the observed labor market dynamics in response to shocks of a plausible magnitude, and deliver substantial movements along a downward-sloping Beveridge curve.

Keywords

Liquidity EffectLimited ParticipationLabor Search and MatchingBeveridge Curve
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Issue 2 , April 2011 , pp. 201 - 222
Copyright
Copyright © Cambridge University Press 2010

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