Razor innovation in macroeconomics

Macroeconomics is sometimes like Gillette razors. There is regularly an innovative razor that happens to have more blades than the previous one. And once it gets out of hand, the new razor goes back to fundamentals and has only one blade, before the cycle starts again. In macroeconomics, there was this fad of adding more an more shocks to models until everything became very confusing and unidentifiable. So we returned to simple models (Occam's razor was the innovation) that became more powerful because of the presence of a market friction. Now, these search frictions are appearing everywhere, one-by-one or in pairs, and the latest generation of models has three frictions.

In a pair of papers, Etienne Wasmer alone and then with Nicolas Petrosky-Nadeau introduces search frictions on labor, credit and goods markets. The first is more of an exercise of style, showing it can be elegantly solved in steady-state thanks to block-recursiveness. The second paper is more interesting, as it looks at the dynamic properties of the model and shows that is can better account for the persistence of fluctuations in the data (what frictions are good at) and the volatility of labor flows. Interesting results, especially in the light of the pronounced lag in the recovery of employment in the US these days.

I am waiting for the four-friction model now.

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