An Estimated Small Open Economy Model with Labour Market Frictions
AbstractWe estimate small open economy models with involuntary unemployment using Australian data from 1993 to 2007, focusing on hiring costs and real wage rigidity. We find a strong preference for models with hiring costs, which account for 0.97% of GDP. The data favour models with real over nominal wage rigidity. Impulse responses to technology shocks reveal no productivity-employment puzzle for the preferred model. In the short run, technology shocks, operating through hiring costs via labour demand, explain most unemployment variance, while labour preference shocks explain most real wage variance. Demand shocks dominate supply shocks in explaining output variance. In the long run, these contributions reverse. Out-of-sample conditional forecasts perform well but cannot predict the confidence effects of the crisis.
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Bibliographic InfoPaper provided by CEPREMAP in its series Dynare Working Papers with number 35.
Length: 52 pages
Date of creation: Feb 2014
Date of revision:
DSGE; Hiring cost; Wage rigidities; Bayesian estimation; Small open economy;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-03-08 (All new papers)
- NEP-DGE-2014-03-08 (Dynamic General Equilibrium)
- NEP-MAC-2014-03-08 (Macroeconomics)
- NEP-OPM-2014-03-08 (Open Economy Macroeconomics)
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- Wesselbaum, Dennis, 2013. "Labour Market Dynamics in Australia," MPRA Paper 47771, University Library of Munich, Germany.
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