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Endogenous business cycle propagation and the persistence problem: The role of labor-market frictions

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  • Ambler, Steve
  • Guay, Alain
  • Phaneuf, Louis
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    Abstract

    Contrasting sharply with a recent trend in DSGE modeling, we propose a business cycle model where frictions and shocks are chosen with parsimony. The model emphasizes a few labor-market frictions and shocks to monetary policy and technology. The model, estimated from U.S. quarterly postwar data, accounts well for important differences in the serial correlation of the growth rates of aggregate quantities, the size of aggregate fluctuations and key comovements, including the correlation between hours and labor productivity. Despite its simplicity, the model offers an answer to the persistence problem (Chari et al., 2000) that does not rely on multiple frictions and adjustment lags or ad hoc backward-looking components. We conclude modern DSGE models need not embed large batteries of frictions and shocks to account for the salient features of postwar business cycles.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 36 (2012)
    Issue (Month): 1 ()
    Pages: 47-62

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    Handle: RePEc:eee:dyncon:v:36:y:2012:i:1:p:47-62

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    Keywords: Business cycle propagation; Persistence problem; Sticky wages; Costly labor adjustment;

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    Cited by:
    1. Nooman Rebei, 2012. "What (Really) Accounts for the Fall in Hours After a Technology Shock?," IMF Working Papers 12/211, International Monetary Fund.
    2. Malikane, Christopher, 2012. "The Microfoundations of the Keynesian Wage-Price Spiral," MPRA Paper 42923, University Library of Munich, Germany, revised 2012.
    3. Franke, Reiner & Jang, Tae-Seok & Sacht, Stephen, 2012. "Moment matching versus Bayesian estimation: Backward-looking behaviour in a New-Keynesian baseline model," Economics Working Papers 2012-08, Christian-Albrechts-University of Kiel, Department of Economics.
    4. Rhee, Hyuk-jae & Turdaliev, Nurlan, 2013. "Optimal monetary policy in a small open economy with staggered wage and price contracts," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 306-323.

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