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Non-Walrasian Labor Market and the European Business Cycle

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Author Info
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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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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Related research
Keywords: trade unions; business cycle; inflation; persistance;

Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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References listed on IDEAS
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Full references

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. 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!]
    Other versions:
  2. 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!]
  3. Francesco Zanetti, 2006. "Labor Market Institutions and Aggregate Fluctuations in a Search and Matching Model," Computing in Economics and Finance 2006 445, Society for Computational Economics. [Downloadable!]
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