Pigou Cycles in Closed and Open Economies with Matching Frictions

Abstract

Den Haan and Kaltenbrunner (2009) show that a simple labor market matching model can generate Pigou cycles— i.e., a positive comovement in consumption, investment, and employment in response to news about future macroeconomic developments. However, investment moves in the right direction only for a small set of parameter values. This paper shows that an open-economy version in which international capital ‡ows dampen domestic interest rate responses can robustly generate Pigou cycles. In models with a spot market for labor, sticky interest rates reinforce