THE INTEGRATION OF SEARCH IN MACROECONOMICS: TWO ALTERNATIVE PATHS

Abstract

Our paper analyzes and compares two attempts at integrating unemployment in macroeconomics. The first, due to Peter Diamond, consists in a search model exhibiting multiple equilibria and wherein cycles may be produced. The second is due to David Andolfatto and Monika Merz, who, more or less simultaneously, constructed models enabling the integration of the matching function into RBC modeling. In the first sections, we present the methodology upon which our paper is based—Axel Leijonhufvud’s decision-tree insight—and briefly describe these three economists’ motivations and the context in which they were working. We continue with recounting the birth and further development of the search paradigm upon which Diamond’s, Andolfatto’s, and Merz’s attempts were based. These preliminaries settled, we address the heart of the paper, the critical analysis of their respective contributions. Our interest lies specifically in how they made their way in the development of the field. We explain why Diamond’s model, which ambitioned to rival Robert Lucas’s explanation of business fluctuations, did not live up to its author’s expectations. Andolfatto’s and Merz’s project was less ambitious, yet their model became an established component of the RBC program—but at the price of abandoning several constitutive traits of the search approach.