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Propagation in a Model of Goods, Labor and Financial Market Frictions

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  • Etienne Wasmer

    (Sciences Po, Paris)

  • Nicolas Petrosky-Nadeau

    (Carnegie Mellon University)

Abstract

Investigating mechanisms of propagation has been central to the business cycle research agenda since its inception. Recent search models of the labor market fail in generating both the size and the persistence of their of central variables to productivity shocks, as does the RBC model in the case of output. Building a model with three imperfect markets - goods, labor and credit -, we find that goods market frictions drastically change the qualitative and quantitative dynamics of labor market variables, leading to significant improvements in bridging the gap with the data both in terms of persistence and volatility. Two factors affecting the expected path of the value to hiring a worker generate persistence: first, the expected dynamics of congestion on goods market, which depends on consumers' search for goods and the entry of new products; and second, the expected dynamics of prices, which alter future profit flows. In the absence of these frictions, there is no persistence in the growth rates, and little amplification, of labor market variables.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 119.

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Date of creation: 2011
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Handle: RePEc:red:sed011:119

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  1. Benassy, Jean-Pascal, 1993. "Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 732-61, June.
  2. Nicolas Petrosky-Nadeau & Etienne Wasmer, . "The cyclical volatility of labor markets under frictional financial markets," GSIA Working Papers 2010-E1, Carnegie Mellon University, Tepper School of Business.
  3. Steven J. Davis & John Haltiwanger, 1990. "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 123-186 National Bureau of Economic Research, Inc.
  4. Dale T. Mortensen & Eva Nagypal, 2005. "More on Unemployment and Vacancy Fluctuations," NBER Working Papers 11692, National Bureau of Economic Research, Inc.
  5. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
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  7. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  8. Nicolas Petrosky-Nadeau, 2014. "Credit, Vacancies and Unemployment Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 191-205, April.
  9. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  10. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
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Cited by:
  1. Etienne Wasmer, 2011. "A steady-state model of a non-walrasian economy with three imperfect markets," Sciences Po publications info:hdl:2441/5l6uh8ogmqi, Sciences Po.

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