This paper points out an empirical failing of real business cycle models in which unemployment is endogenized through a matching function. One can easily choose a calibration to make the cyclical fluctuation in unemployment as large in the model as it is in the data, or to make the response of...

This paper points out an empirical failing of real business cycle models in which unemployment is endogenized through a matching function. One can easily choose a calibration to make the cyclical fluctuation in unemployment as large in the model as it is in the data, or to make the response of...

We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the cost of business cycles and locate the optimum in a set of simple cyclical fiscal policies. Our economy exhibits productivity shocks, giving firms an incentive to hire...