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Labor Market Frictions and the International Propagation Mechanism

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  • Lise Patureau

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    (Université de Cergy-Pontoise, THEMA, F-95000 Cergy-Pontoise)

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    Abstract

    The paper investigates the determinants of international business cycle comovement in a two-country Dynamic Stochastic General Equilibrium (DSGE) model featured by monopolistic competition and nominal price rigidity, following so the New Open Economy Macroeconomy (NOEM) literature. Within this framework, we assess the role of labor market search and matching frictions in the international propagation of supply and monetary shocks. Our results show that labor market frictions improve the ability of the New Open Economy Macroeconomy framework to account for international business cycles comovement. In particular, the NOEM model with labor market search is consistent with the international propagation mechanism of monetary shocks identified in the data. Through their impact on labor market dynamics, labor market institutions affect the magnitude of international comovement. Business cycle synchronization is thus found to increase with the generosity of the unemployment benefits system, whereas it decreases with the strictness of employment protection.

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    Bibliographic Info

    Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2009-05.

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    Date of creation: 2009
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    Handle: RePEc:ema:worpap:2009-05

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    Keywords: International business cycles; Search; Labor market institutions; Wage bargaining; International transmission of shocks;

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