Overview of the Book

This book offers an integrated framework to study the theoretical and quantitative properties of economies with frictions in multiple markets. Building on analyses of markets with frictions by 2010 Nobel laureates Peter A. Diamond, Dale T. Mortensen, and Christopher A. Pissarides, which provided a new theoretical approach to search markets, the book applies this new paradigm to labor, finance, and goods markets. It shows, in particular, how frictions in different markets interact with each other.

The book first covers the main developments in the analysis of the labor market in the presence of frictions, offering a systematic analysis of the dynamics of this environment and explaining the notion of macroeconomic volatility. Then, building on the generality and simplicity of the search analysis, the book adapts it to other markets, developing the tools and concepts to analyze friction in these markets. The book goes beyond the traditional general equilibrium analysis of markets, which is often frictionless. It begins with the standard analysis of a single market, and then sequentially integrates more markets into the analysis, progressing from labor to financial to goods markets. Along the way, the book provides a number of useful results and insights, including the existence of a direct link between search frictions and the degree of volatility in the economy.

About the Authors

Nicolas Petrosky-Nadeau, formerly on the faculty of the Tepper School of Business at Carnegie Mellon University, is Senior Research Adviser in the Economic Research department of the Federal Reserve Bank of San Francisco.

Etienne Wasmer, formerly Professor of Economics at Sciences Po, Paris, where he is also Cofounder and Codirector of the Interdisciplinary Research Center for the Evaluation of Public Policies, is Professor of of Economics at New York University Abu Dhabi, a school of New York University in the UAE, as of January 2018.

Reviews

Work in markets with frictions has proliferated since the turn of the millennium, both in the original matching framework of the labour market and importantly in other markets. Petrosky-Nadeau and Wasmer have been among the pioneers in the extensions of this literature to goods and financial markets. The profession should be grateful that we now have in an accessible form a review of more recent contributions to the labour market and, for the first time, a unified framework for the study of frictions in goods and financial markets. Their book is a must-read for everyone working in this area, be it students or academics, or simply for anyone interested to learn the impact of frictions in a variety of market situations.

by Christopher A. Pissarides, School Professor of Economics and Political Science, Regius Professor of Economics, London School of Economics; Nobel Laureate in Economics, 2010

Read this book right after you finish Chris Pissarides's classic Equilibrium Unemployment Theory. Petrosky-Nadeau and Wasmer give a masterly review of the rich literature that has evolved from the basic search-and-matching model that won the Nobel prize in 2010, including their many original contributions in extending the reach of the model.

by Robert E. Hall, Robert and Carole McNeil Joint Hoover Senior Fellow and Professor of Economics, Stanford University

The book by Petrosky-Nadeau and Wasmer is a must-read for all economists interested in search/matching frictions in labor, credit, and goods market. The approach is both qualitative and quantitative and has a rich set of implications, including financial and fiscal multipliers, the formation of prices and wages, the dynamics of the labor market, efficiency and policies. It is a transformational book that will have a long-lasting effect on macro/labor economics.

by Guillaume Rocheteau, Professor at University of California at Irvine

The search and matching approach pioneered by Diamond, Mortensen and Pissarides provides a framework to analyze decentralized markets. Most applications so far have focused on the labor market, but recent research emphasizes the importance of similar search frictions in many other areas such as goods and services, housing, and asset markets. This beautiful book, building on published research by the authors, proposes an elegant novel approach to study the joint impact of search frictions in several markets. They show how search frictions have implications for a variety of important macroeconomic issues such as business cycle propagation, financial amplification, or fiscal multipliers.

by François Gourio, Senior economist and research advisor, Federal Reserve Bank of Chicago

This splendid textbook integrates “multi frictions” in an economy with labor, credit, and goods markets. By combining the latest methodological advances in search and dynamic general equilibrium theories in a rigorous and tractable way, it provides a major contribution to our understanding of how the interactions among frictions in different markets affect business cycles. I bet it will be become soon a classic reference for scholars and graduate students working on these topics.

by Juan J. Dolado, Professor at European University Institute