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Assessing the empirical relevance of Walrasian labor frictions to business cycle fluctuations

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  • Joao Madeira

    (Department of Economics, University of Exeter)

Abstract

This paper describes and estimates (with a Bayesian likelihood approach) an otherwise standard dynamic stochastic general equilibrium model, with both sticky prices and wages, augmented with several labor market rigidities (of a Walrasian nature), namely: indivisible labor, predetermined straight time employment numbers (in which case, firms adjust overtime employment to respond to unexpected shocks), hiring expenses and convex adjustment costs. The results show all these frictions to be empirically important. Labor frictions are shown to have important implications to business cycle dynamics and economic policy making. Labor frictions imply TFP shocks have a greater role in accounting for business cycle dynamics. Labor frictions also imply fiscal policy to lead to a greater crowding out of private sector activity and monetary policy to be more e¤ective in achieving disinflation.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1304.pdf
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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1304.

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Date of creation: 2013
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Handle: RePEc:exe:wpaper:1304

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Related research

Keywords: DSGE; New Keynesian; labor frictions; indivisible labor; labor adjustment costs; overtime; employment; hours.;

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  1. Luca Sala & Antonella Trigari & Mark Gertler, 2007. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," 2007 Meeting Papers 353, Society for Economic Dynamics.
  2. Jaimovich, Nir & Rebelo, Sérgio, 2007. "News and Business Cycles in Open Economies," CEPR Discussion Papers 6520, C.E.P.R. Discussion Papers.
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  7. Thomas Lubik & Michael Krause, 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Economics Working Paper Archive 504, The Johns Hopkins University,Department of Economics.
  8. Matthew D. Shapiro, 1984. "The Dynamic Demand for Capital and Labor," Cowles Foundation Discussion Papers 735, Cowles Foundation for Research in Economics, Yale University.
  9. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  10. Batini, Nicoletta & Jackson, Brian & Nickell, Stephen, 2005. "An open-economy new Keynesian Phillips curve for the U.K," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1061-1071, September.
  11. Peter N. Ireland, 2002. "Technology Shocks in the New Keynesian Model," Boston College Working Papers in Economics 536, Boston College Department of Economics.
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  13. Yongsung Chang & Taeyoung Doh & Frank Schorfheide, 2007. "Non-stationary Hours in a DSGE Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1357-1373, 09.
  14. Jean-Pierre Danthine & Andre Kurmann, 2004. "Fair Wages in a New Keynesian Model of the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 107-142, January.
  15. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  16. George J. Hall, 1994. "Overtime, effort and the propagation of business cycle shocks," Working Paper Series, Macroeconomic Issues 94-25, Federal Reserve Bank of Chicago.
  17. Lucas, Robert E, Jr, 1970. "Capacity, Overtime, and Empirical Production Functions," American Economic Review, American Economic Association, vol. 60(2), pages 23-27, May.
  18. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
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