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Non-Walrasian Labor Market and the European Business Cycle

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  • Francesco Zanetti

    ()
    (Boston College)

Abstract

This paper investigates to what extent a New Keynesian, monetary model with the addition of a microfounded, non-Walrasian labor market based on union bargaining is able to replicate key aspects of the European business cycle. The presence of a representative union permits to explain two features of the cycle. First, it generates an endogenous mechanism which produces persistent responses of the economy to both supply and demand shocks. Second, labor unionization causes a lower elasticity of marginal costs to output. This leads to lower inflation volatility. The model can replicate the negative correlation between productivity shocks and employment in the data. Model simulations show the superiority of the unionized framework to reproduce European business cycle statistics relative to a model with competitive labor market.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 574.

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Length: 35 pages
Date of creation: 01 Apr 2003
Date of revision: 20 May 2004
Handle: RePEc:boc:bocoec:574

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Keywords: trade unions; business cycle; inflation; persistance;

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Cited by:
  1. 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.
  2. Fabrizio Mattesini & Lorenza Rossi, 2008. "Productivity Shocks And Optimal Monetary Policy In A Unionized Labor Market Economy," Manchester School, University of Manchester, vol. 76(5), pages 578-611, 09.
  3. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, vol. 55(5), pages 644-658, June.
  4. Ardagna, Silvia, 2007. "Fiscal Policy in Unionized Labor Markets," Scholarly Articles 2580048, Harvard University Department of Economics.
  5. Lorenza Rossi & Fabrizio Mattesini, 2008. "We analyze, in this paper, a DSGE New Keynesian model with indi- visible labor where firms may belong to two different final goods producing sectors one where wages and employment are determined in co," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0077, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  6. Mattesini Fabrizio & Rossi Lorenza, 2008. "Optimal monetary policy in economies with dual labor markets," wp.comunite 0037, Department of Communication, University of Teramo.
  7. Ardagna, Silvia, 2007. "Fiscal policy in unionized labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1498-1534, May.

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