Comment

Abstract

There is now a fast growing literature extending real business cycle (RBC) models to include search and matching frictions. The aim of the literature is to explore the business cycle properties of the labor market as to what the basic mechanisms are and which shocks that matter. This is a very interesting area of research, and the literature has made considerable progress over the last fi ve to seven years. The paper of Justiniano and Michelacci makes a valuable contribution to this literature along several lines. First, it develops a more elaborate model than the existing ones, including novel shocks and mechanisms. Second, it uses a rather advanced estimation method, with a full information Bayesian method. Third, it includes a broader empirical application, analyzing the empirical performance of the United States and fi ve European countries (France, Germany, Norway, Sweden, and the United Kingdom). In this discussion, I will fi rst briefl y describe the key elements of the model, then consider some of them in more detail. Finally, I will discuss what we can learn from this paper, as well as from the literature to which it belongs. As will be clear, my overall view of the paper and the literature in general is favorable. Yet I also think that the analysis gives a somewhat exaggerated picture of how much of the variation in the data that the model is really able to explain. Future research should explore the validity of the key shocks and mechanisms, also by use of other methods and other type of data.