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Accounting For The Cyclical Dynamics Of Income Shares

Listed author(s):
  • ENCHUAN SHAO
  • PEDRO SILOS

type="main" xml:lang="en"> Over the business cycle, labor's share of output is negatively but weakly correlated with output, and it lags output by about four quarters. Profits' share is strongly pro-cyclical. It neither leads nor lags output, and its volatility is about five times that of output. Those assumptions relate to the structure of aggregate technology and the degree of competition in factor markets. Despite much evidence in favor of time-varying income shares, macroeconomics still lacks models that can account for their time series facts. This article constructs a model that can replicate those facts. We introduce costly entry of firms in a model with frictional labor markets and find a link between the ability of the model to replicate income shares' dynamics and the ability of the model to amplify and propagate shocks. That link is a weak correlation between the real interest rate and output, a fact in U.S. data but a feature that models of aggregate fluctuations have had difficulty achieving. (JEL E3, E25, J3, E24)

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File URL: http://hdl.handle.net/10.1111/ecin.12065
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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 52 (2014)
Issue (Month): 2 (04)
Pages: 778-795

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Handle: RePEc:bla:ecinqu:v:52:y:2014:i:2:p:778-795
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  1. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-690, September.
  2. Feenstra, Robert C., 2003. "A homothetic utility function for monopolistic competition models, without constant price elasticity," Economics Letters, Elsevier, vol. 78(1), pages 79-86, January.
  3. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
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