Macroeconomic Dynamics in a Model of Goods,Labor and Credit Market Frictions

Building a model with three imperfect markets – goods, labor and credit – representing aproduct’s life-cycle, we find that goods market frictions drastically change the qualitative andquantitative dynamics of labor market variables. The calibrated model leads to a significantreduction in the gap with the data, both in terms of persistence and volatility while searchmodels of the labor market fail in one of the two dimensions. Two factors related to goodsmarket frictions generate these results: i) the expected dynamics of consumers’ search forgoods, itself depending on the income redistributed by firms and the entry of new products;and ii) the expected dynamics of prices, which alter future profit flows....