TY  - JOUR
AU  - Ravn, Morten O
TI  - The Consumption-Tightness Puzzle
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12421
PY  - 2006
Y2  - August 2006
DO  - 10.3386/w12421
UR  - http://www.nber.org/papers/w12421
L1  - http://www.nber.org/papers/w12421.pdf
N1  - Author contact info:
Morten Ravn
Department of Economics
University College London
London WC1E 6BT
UK
E-Mail: m.ravn@ucl.ac.uk
M1  - published as Morten O. Ravn. "The Consumption-Tightness Puzzle," in Lucrezia Reichlin and Kenneth West, organizers, "NBER International Seminar on Macroeconomics 2006" University of Chicago Press (2008)

AB  - This paper introduces a labor force participation choice into a labor market matching model embedded in a dynamic stochastic general equilibrium set-up with production and savings. The participation choice is modelled as a tradeoff between forgoing the expected benefits of being search active and engaging in costly labor market search. The model induces a symmetry in firms%u2019 and workers%u2019 search decision since both sides of the labor market vary search effort at the extensive margins. We show that this set-up is of considerable analytical convenience and that it gives rise to a linear relationship between labor market tightness and the marginal utility of consumption. We refer to the latter as the %u201Cconsumption - tightness puzzle%u201D because (a) it gives rise to a number of counterfactual implications, and (b) it is a robust implication of theory.  Amongst the counterfactual implications are very low volatility of tightness, procyclical unemployment, and a positively sloped Beveridge curve. These implications all derive from procyclical variations in participation rates that follow from allowing for the extensive search margin.
ER  -