The fundamental surplus strikes again
Matching models constitute the dominant approach to analyze unemployment in macroeconomics, with a variety of models featuring different mechanisms. Remarkably, transcending this diversity, there is a single intermediate channel – the fundamental surplus – through which economic forces affecting the responsiveness of unemployment to productivity must operate, as discovered by SSE professor Lars Ljungqvist and co-author Thomas Sargent. In this recently published article, they explain what drives unemployment fluctuations in a leading DSGE framework that incorporates matching models.*)
*) The term DSGE model is an abbreviation of Dynamic Stochastic General Equilibrium model and refers to macroeconomic models used to explain and predict comovements of aggregate time series over the business cycle and to perform policy analysis.
The fundamental surplus isolates parameters that determine how sensitively unemployment responds to productivity shocks in the matching models of Christiano et al. (2016 and this issue) under either Nash bargaining or alternating-offer bargaining. Those models thus join a collection of models in which diverse forces are intermediated through the fundamental surplus.