A search equilibrium approach to real business cycle theory

This dissertation attempts to construct an explicit theory of unemployment. The basic framework is a revised Hansen's real business cycle (RBC) model with divisible labor. Search theory is incorporated to remedy the inadequacy in RBC's modeling the labor market. Unemployed workers or firms with vacancies incur costs when they search for jobs or employees. Since the costs depend on the tightness or thinness of output and labor markets, there exists externalities that affect individuals' decisions. We utilize Pissarides' (1990) specification on the dependence of firm's employment on aggregate labor-market performance to incorporate search/matching elements into our model. This thesis integrates the equilibrium approach of the RBC models and search theory. An equilibrium approach is a good starting point to construct a model to study business fluctuations. Search theory provides a more detail analysis of the matching of heterogeneous workers and firms. The externalities raised by search affect individuals' decisions and thus accelerate the effect of initial productivity shocks and lead to a persistent and serially correlated response of unemployment. The RBC models have shown to have a powerful prediction power. We implement the quantitative techniques adopted by real business cycle theorists to test the integrated model. The search aspects of our model introduces important labor variables into the model, expanding the empirical content of the simulations.