Three Essays on Inflation and Unemployment Fluctuations in the United States

This thesis consists of three essays examining the driving forces behind in inflation and unemployment fluctuations in the United States.In the first essay, a time-varying parameter vector auto-regressive model with stochastic volatility and mixture innovations is developed to study the empirical relevance of the Lucas critique for the postwar U.S. economy. Contrary to the Lucas critique, there are large changes at certain points of time in the parameters associated with monetary policy that do not correspond to changes in reduced-form parameters for inflation or the unemployment rate. However, an apparent reduction in the late1980s in the impact of monetary policy shocks on inflation, but not on the unemployment rate, is documented. Related, there appear to be changes in the slope of Phillips Curve in the 1970s and especially since the mid-1990s.In the second essay, endogenous labor force participation, partial consumption insurance, and unemployment are introduced into an otherwise standard New Keynesian Diamond-Mortensen-Pissarides model. In the model, the unemployed pay certain costs to search for a job and they are better off if matched with one. Hence, any resulting unemployment is involuntary and satisfies the official definition of unemployment in the United States. I find that allowing for endogenous labor force participation greatly improves the model fit for U.S. data. Model estimates suggest an extremely high degree of real wage rigidity to account for the labor market data.It appears that the price markup shock and matching efficiency shock are the two key driving forces of unemployment fluctuations.In the third essay, the role of matching efficiency at the aggregate level in driving unemployment fluctuations is estimated using a TVP-SVAR model. Observing that estimated aggregate matching efficiency lags business cycles, I identify aggregate matching efficiency shock using standard timing restrictions. I conclude that aggregate matching efficiency shock explains no more than 20% of the variation in unemployment in the United States between 1967-2013, whereas the aggregate shocks explain above 70% of unemployment fluctuations. Related, the rise in the unemployment rate during the Great Recession is dominated by a slump in aggregate demandrather than being driven by structural factors