Financial Factors and Labour Market Fluctuations
AbstractWhat are the effects of financial market imperfections on unemployment and vacancies? Since standard DSGE models do not typically model unemployment, they abstract from this issue. In this paper I augment a standard monetary DSGE model with explicit financial and labour market frictions and estimate the model using US data for the period 1964:Q1-2010:Q3. I find that the estimated degree of financial frictions is higher when financial data and shocks are included. The model matches the aggregate volatility in the data reasonably well. In particular, for the labour market, the model is able to generate highly volatile unemployment and vacancies, and a relatively rigid real wage. Further, I find that the financial accelerator mechanism plays an important role in amplifying the effects of financial shocks on unemployment and vacancies. Overall, financial shocks explain about 37 per cent of the fluctuations in unemployment and vacancies.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 11-12.
Length: 48 pages
Date of creation: 2011
Date of revision:
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Economic models; Financial markets; Labour markets;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- J6 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-15 (All new papers)
- NEP-DGE-2011-10-15 (Dynamic General Equilibrium)
- NEP-LAB-2011-10-15 (Labour Economics)
- NEP-MAC-2011-10-15 (Macroeconomics)
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- Yahong Zhang, 2011. "Financial Frictions, Financial Shocks and Labour Market Fluctuations in Canada," Discussion Papers 11-10, Bank of Canada.
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