We develop and estimate a general equilibrium search and matching model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, we do not impose wage inertia. Instead we derive wage inertia from our specification of how firms and workers negotiate wages. Our model outperforms a variant of the standard New Keynesian Calvo sticky wage model. According to our estimated model, there is a critical interaction between the degree of price stickiness, monetary policy, and the duration of an increase in unemployment benefits.

This paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime-separable. The nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked. These cross-relations are examined empirically using postwar monthly U. S. data on quantities, real wages, and the real return on the one-month Treasury bill. The estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models. Several possible explanations of these discrepancies are discussed.