Shirking in a monetary business cycle model

Abstract .  This paper investigates whether a limited participation model with imperfectly observed effort can reproduce the economy's responses to a monetary policy shock without appealing to high labour supply elasticities or high markups. The results demonstrate that the presence of imperfectly observed effort, in combination with the limited participation assumption, allows the model to account for the presence of involuntary unemployment, nominal wage rigidity, and the observed responses to monetary policy shocks.