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Labor Market Institutions and Aggregate Fluctuations in a Search and Matching Model

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  • Bank of England
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    Abstract

    This paper explores the influence of labor market institutions on aggregate fluctuations. It uses a dynamic, stochastic, general equilibrium model characterized by search and matching frictions in the labor market and nominal rigidities in the goods market. It finds that firing costs and unemployment benefits can have substantial effects on aggregate fluctuations. Increasing firing costs decreases the volatility of output, employment and job flows, due to the reduction of the mass of jobs sensitive to disturbances and lower incentives for firms to hire and fire workers. Hence, firms adjust to shocks mainly through prices, and inflation then becomes more volatile. Raising unemployment benefits has the reverse effect on aggregate fluctuations.

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    File URL: http://www.economicdynamics.org/meetpapers/2008/paper_370.pdf
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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 370.

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    Date of creation: 2008
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    Handle: RePEc:red:sed008:370

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    22. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
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