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Okun’s macroscope and the changing cyclicality of underlying margins of adjustment

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  • Mary C. Daly
  • John G. Fernald
  • Òscar Jordà
  • Fernanda Nechio

Abstract

We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide factor markets (as in Chari et al. 2000) or firm-specific factor markets (as in Woodford 2005). Sectoral specificity induces within-sector strategic substitutability and across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two models, depending on the distribution of price rigidity across sectors. Under the empirical distribution for the U.S., our model behaves similarly to an economy with firm-specific factors in the short-run, and later on approaches the dynamics of the model with economy-wide factor markets. This is consistent with the idea that factor price equalization might take place gradually over time, so that firm-specificity might be a reasonable short-run approximation, whereas economy-wide markets might be a better description of how factors of production are allocated in the longer run.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2013-32.

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Date of creation: 2013
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Handle: RePEc:fip:fedfwp:2013-32

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  1. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 161-182, March.
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  7. Barnichon, Regis, 2010. "Productivity and unemployment over the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(8), pages 1013-1025, November.
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  14. Prachowny, Martin F J, 1993. "Okun's Law: Theoretical Foundations and Revised Estimates," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 331-36, May.
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Cited by:
  1. Mary C. Daly & John G. Fernald & Òscar Jordà & Fernanda Nechio, 2014. "Labour Markets in the Global Financial Crisis: The Good, the Bad and the Ugly," National Institute Economic Review, National Institute of Economic and Social Research, National Institute of Economic and Social Research, vol. 228(1), pages R58-R64, May.

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