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This paper considers a real business cycle model with search frictions in the labor market and labor supply which is elastic along the participation margin. Previous authors have found that such models generate counterfactually procyclical unemployment and a positively-sloped Beveridge curve. This paper presents a calibrated model which succeeds at generating countercyclical unemployment and a negatively-sloped Beveridge curve despite the presence of a participation margin. Recently, there has been renewed interest in the business cycle properties of models with search frictions and wage bargaining. Beginning with the seminal papers of Shimer (2005) and Hall (2005), a growing body of literature examines the ability of business cycle models with Mortensen-Pissarides search frictions to account for the cyclical variation of labor market variables.
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