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Dyanmic Response to Monetary Shocks in a Search Model of the Labor Market

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  • Alvaro Riascos

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Abstract

This paper studies the dynamic response of a few key macroeconomic variables to each one of three exogenous shocks: monetary, government spending and technological shocks. By using a cash in advance model with two market frictions, one in the intermediation of loanable funds, and one in the labor market, we address the ability of the model to simulate data embedded with the same dynamic response to shocks observed in historical data (i.e we estimate dynamic multipliers to exogenous shocks by estimating a VARX model to both sets of data). We find evidence on the short run expansionary effects of monetary policy and we highlight the importance of studyng the real interest rate dynamics as opposed to the nominal interest rate. In terms of the former we do observe a coutercyclical movement of money and interest rates, while in term of the latter, we don't. We also find a good perfomance of the model in tracing out the dynamic response of output after any one of the three shocks. Investment and employment dynamics are well reproduced when the economy is subject to government spending or technological shocks. We make a case for using this particular validation technique as a complementary alternative for testing the perfomance of calibrated dynamic general equilibrium models

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 222.

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Handle: RePEc:bdr:borrec:222

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  1. Chéron, A. & Langot, François, 1999. "The Phillips and Beveridge curves revisited," CEPREMAP Working Papers (Couverture Orange) 9905, CEPREMAP.
  2. Blanchard, J.O., 1989. "The Aggregate Matching Function," Working papers 538, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report 227, Federal Reserve Bank of Minneapolis.
  4. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October.
  5. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-50, June.
  6. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  7. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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Cited by:
  1. Alvaroriascos & Luis Fernando Melo Velandia, 2004. "Sobre Los Efectos Dela Politica Monetaria Encolombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  2. Mario Nigrinis Ospina, . "Es lineal la Curva de Phillips en Colombia?," Borradores de Economia 281, Banco de la Republica de Colombia.
  3. Alvaro Riascos, . "Monetary Policy Rules in a Search Model of the Labor Market," Borradores de Economia 221, Banco de la Republica de Colombia.

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