Working Papers
By Year:
Paper #  Author  Title  

11009 
Guido Menzio Shouyong Shi Hongfei Sun 
"A Monetary Theory with NonDegenerate Distributions"  
Dispersion of money balances among individuals is the basis for a range of policies but it has been abstracted from in monetary theory for tractability reasons. In this paper, we fill in this gap by constructing a tractable search model of money with a nondegenerate distribution of money holdings. We assume search to be directed in the sense that buyers know the terms of trade before visiting particular sellers. Directed search makes the monetary steady state block recursive in the sense that individuals’ policy functions, value functions and the market tightness function are all independent of the distribution of individuals over money balances, although the distribution affects the aggregate activity by itself. Block recursivity enables us to characterize the equilibrium analytically. By adapting latticetheoretic techniques, we characterize individuals’ policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists. Moreover, we provide conditions under which the steadystate distribution of buyers over money balances is nondegenerate and analyze the properties of this distribution. Download Paper


09010 
Guido Menzio Shouyong Shi 
"Efficient Search on the Job and the Business Cycle", Second Version  
We build a directed search model of the labor market in which workers’ transitions between unemployment, employment, and across employers are endogenous. We prove the existence, uniqueness and efficiency of a recursive equilibrium with the property that the distribution of workers across employment states affects neither the agents’ values and strategies nor the market tightness. Because of this property, we are able to compute the equilibrium outside the nonstochastic steadystate. We use a calibrated version of the model to measure the effect of productivity shocks on the US labor market. We find that productivity shocks generate procyclical fluctuations in the rate at which unemployed workers become employed and countercyclical fluctuations in the rate at which employed workers become unemployed. Moreover, we find that productivity shocks generate large countercyclical fluctuations in the number of vacancies opened for unemployed workers and even larger procyclical fluctuations in the number of vacancies created for employed workers. Overall, productivity shocks alone can account for 80 percent of unemployment volatility, 30 percent of vacancy volatility and for the nearly perfect negative correlation between unemployment and vacancies. Download Paper


09005 
Guido Menzio Shouyong Shi 
"Block Recursive Equilibria for Stochastic Models of Search on the Job"  
In this paper, we develop a general stochastic model of directed search on the job. Like in the analogous models of random search on the job, the state of the economy in our model includes the infinitedimensional distribution of workers across different employment states (unemployment, and employment at different wages). Unlike the analogous models of random search on the job, our model admits an equilibrium in which the agents’ value and policy functions does not depend on the distribution of workers. We refer to this type of equilibrium as a Block Recursive Equilibrium. Therefore, while solving the equilibrium of a random search model in a stochastic environment is a difficult task both analytically and computationally, solving the Block Recursive Equilibrium of our model is as easy as solving a representative agent model. Download Paper


08029 
Guido Menzio Shouyong Shi 
"Efficient Search on the Job and the Business Cycle"  
We build a directed search model of the labor market in which workers’ transitions between unemployment, employment, and across employers are endogenous. We prove the existence, uniqueness and efficiency of a recursive equilibrium with the property that the distribution of workers across employment states does not affect the agents’ values and strategies. Because of this property, we are able to compute the equilibrium outside the nonstochastic steadystate. We use a calibrated version of the model to measure the effect of productivity shocks on the US labor market. We find that productivity shocks generate procyclical fluctuations in the rate at which unemployed workers become employed and countercyclical fluctuations in the rate at which employed workers become unemployed. Moreover, we find that productivity shocks generate large countercyclical fluctuations in the number of vacancies opened for unemployed workers and even larger procyclical fluctuations in the number of vacancies created for employed workers. Overall, productivity shocks alone can account for 80 percent of unemployment volatility, 30 percent of vacancy volatility and for the nearly perfect negative correlation between unemployment and vacancies. Download Paper
