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Labor Markets and Business Cycles by Robert Shimer

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3

Real Effects of Productivity Shocks

I now extend the benchmark search model to study environments in which productivity shocks affect employment. The assumptions that drive the exact neutrality result in chapter 2 are special, in the sense that many modifications of the model imply that unemployment fluctuates cyclically. The modifications I consider here are based on two criteria: tractability and empirical relevance.

I start, in section 3.1, with the easiest modification of the benchmark model: an alternative formulation of preferences. More precisely, I maintain the assumption that preferences are consistent with balanced growth, but I relax the assumption that the intertemporal elasticity of substitution in consumption is equal to one, ...

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