Capital, Endogenous Separations, and the Business Cycle

This paper implements capital in an endogenous separations New Keynesian matching model. We propose a more general approach, such that workers have unrestricted access to a proportional share of the capital stock. We find that the introduction of capital generates an important

channel for the transmission of aggregate productivity shocks. Our model generates higher volatilities of key variables and enhances the performance of the matching model to generate stylized facts in response to an aggregate productivity shock. However, we show that this holds only in the presence of sticky prices and that our additional channel seems to be important for the propagation of productivity shocks.