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Incorporating Labour Market Frictions into an Optimising-Based Monetary Policy Model

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Author Info
Moyen, S.
Sahuc, J-G.

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Abstract

This paper examines the effects of introducing a non Walrasian labour market into the "New Neoclassical Synthesis'' framework. A dynamic stochastic general equilibrium model is formulated, solved, and calibrated in order to evaluate its ability to replicate the main features of the Euro area economy. This framework allows us to study the effects of labour market rigidities, nominal rigidities, and other frictions to give account of the impact of monetary policy, technology, public spending, and preference shocks. Our simulations show that: (i) real rigidities complement but do not supplant nominal rigidities, (ii) the Beveridge and Phillips relations are reproduced, (iii) hours worked are too sensitive an adjustment variable, and (iv) the real wage dynamics is still procyclical.

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Paper provided by Banque de France in its series Documents de Travail with number 105.

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Length: 42 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:bfr:banfra:105

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Related research
Keywords: DSGE models ; Nominal rigidities ; Real rigidities ; Labour market ; Endogenous persistence ; Euro area;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution

References listed on IDEAS
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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  2. 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. [Downloadable!] (restricted)
  3. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April. [Downloadable!] (restricted)
  4. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March. [Downloadable!] (restricted)
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  5. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09. [Downloadable!] (restricted)
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  6. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June. [Downloadable!] (restricted)
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  7. Barbara Petrongolo & Christopher A. Pissarides, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June. [Downloadable!] (restricted)
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  8. Sahuc, Jean-Guillaume, 2002. "A 'Hybrid' Monetary Policy Model: Evidence from the Euro Area," Applied Economics Letters, Taylor and Francis Journals, vol. 9(14), pages 949-55, November. [Downloadable!] (restricted)
  9. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March. [Downloadable!] (restricted)
  10. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, vol. 17(3), pages 247-252. [Downloadable!] (restricted)
  11. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mattesini Fabrizio & Rossi Lorenza, 2007. "Optimal monetary policy in economies with dual labor markets," wp.comunite 0009, Department of Communication, University of Teramo. [Downloadable!]
    Other versions:
  2. Blanchard, Olivier J & Galí, Jordi, 2008. "Labour Markets and Monetary Policy: A New Keynesian Model with Unemployment," CEPR Discussion Papers 6765, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Carlos Thomas, 2006. "Search and Matching Frictions and Optimal Monetary Policy," CEP Discussion Papers dp0743, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  4. Vanhala, Juuso, 2006. "Labour taxation and shock propagation in a New Keynesian model with search frictions," Research Discussion Papers 12/2006, Bank of Finland. [Downloadable!]
  5. Mirko Abbritti; Sebastian Weber, 2008. "Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions," HEI Working Papers 01-2008, Economics Section, The Graduate Institute of International Studies, revised Jan 2008. [Downloadable!]
  6. Poilly, C. & Sahuc, J-G., 2008. "Welfare Implications of Heterogeneous Labor Markets in a Currency Area," Documents de Travail 199, Banque de France. [Downloadable!]
  7. Gregory de Walque & Olivier Pierrard & Henri Sneessens & Raf Wouters, 2009. "Sequential bargaining in a new-Keynesian model with frictional unemployment and staggered ware negotiation," Working Paper Series 1007, European Central Bank. [Downloadable!]
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  8. Fabrizio Mattesini & Lorenza Rossi, 2007. "Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0072, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE). [Downloadable!]
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  9. Vincent Bodart & Gregory De Walque & Olivier Pierrard & Henri R. Sneessens & Raf Wouters, 2006. "Nominal Wage Rigidities in a New Keynesian Model with Frictional Unemployment," IZA Discussion Papers 2528, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  10. Rossi, Lorenza & Mattesini, Fabrizio, 2007. "Optimal Monetary Policy in a Dual Labor Market Economy," MPRA Paper 2468, University Library of Munich, Germany, revised 15 Mar 2007. [Downloadable!]
  11. Juuso Vanhala, 2006. "Labor Taxation, Matching and Shocks in the New Keynesian Model," Computing in Economics and Finance 2006 346, Society for Computational Economics. [Downloadable!]
  12. Rossi, Lorenza & Mattesini, Fabrizio, 2007. "Productivity Shock and Optimal Monetary Policy in a Unionized Labor Market. Forthcoming: The Manchester School," MPRA Paper 8414, University Library of Munich, Germany, revised 2008. [Downloadable!]
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