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Estimated Small Open Economy Model With Frictional Unemployment


This paper investigates labour market dynamics in New Zealand by estimating a structural small open economy model enriched with standard search and matching frictions in the labour market. We show that the model its the business cycle features of key macroeconomic variables reasonably well and provides an appealing monetary transmission mechanism. We then extend our analysis to understand the driving forces behind labour market variables. Our findings suggest that the bulk of variation in labour market variables is solely explained by disturbances pertaining to the labour market.

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Article provided by Wiley Blackwell in its journal Pacific Economic Review.

Volume (Year): 17 (2012)
Issue (Month): 2 (05)
Pages: 326-353

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Handle: RePEc:bla:pacecr:v:17:y:2012:i:2:p:326-353
DOI: j.1468-0106.2012.00585.x
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  1. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  2. Kai Christoffel & Tobias Linzert, 2010. "The Role of Real Wage Rigidity and Labor Market Frictions for Inflation Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1435-1446, October.
  3. Alejandro Justiniano & Bruce Preston, 2006. "Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?," 2006 Meeting Papers 479, Society for Economic Dynamics.
  4. Güneş Kamber & Stephen Millard, 2010. "Using estimated models to assess nominal and real rigidities in the United Kingdom," Reserve Bank of New Zealand Discussion Paper Series DP2010/05, Reserve Bank of New Zealand.
  5. Morten O. Ravn & Saverio Simonelli, 2008. "Labor Market Dynamics and the Business Cycle: Structural Evidence for the United States," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(4), pages 743-777, 03.
  6. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  7. Kai Christoffel & Keith Kuester & Tobias Linzert, 2009. "The Role of Labor Markets for Euro Area Monetary Policy," Kiel Working Papers 1513, Kiel Institute for the World Economy.
  8. Yashiv, Eran, 2006. "Evaluating the performance of the search and matching model," European Economic Review, Elsevier, vol. 50(4), pages 909-936, May.
  9. Michael Kirker, 2008. "Does natural rate variation matter? Evidence from New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/17, Reserve Bank of New Zealand.
  10. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
  11. Troy Matheson, 2006. "Assessing the fit of small open economy DSGEs," Reserve Bank of New Zealand Discussion Paper Series DP2006/11, Reserve Bank of New Zealand.
  12. Kirdan Lees & Troy Matheson & Christie Smith, 2007. "Open Economy Dsge-Var Forecasting And Policy Analysis: Head To Head With The Rbnz Published Forecasts," CAMA Working Papers 2007-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  13. Alejandro Justiniano & Bruce Preston, 2010. "Monetary policy and uncertainty in an empirical small open-economy model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 93-128.
  14. Malin Adolfson & Stefan Laseen & Jesper Lindé & Mattias Villani, 2005. "An estimated New Keynesian small open economy model," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  15. Christoffel, Kai & Kuester, Keith, 2008. "Resuscitating the wage channel in models with unemployment fluctuations," Working Paper Series 0923, European Central Bank.
  16. Kirdan Lees, 2009. "Introducing KITT: The Reserve Bank of New Zealand new DSGE model for forecasting and policy design," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 72, pages 5-20, June.
  17. Alessia Campolmi & Ester Faia, 2011. "Labor market institutions and inflation volatility in the euro area," Post-Print hal-00796300, HAL.
  18. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2009. "The role of labor markets for euro area monetary policy," Kiel Working Papers 1513, Kiel Institute for the World Economy (IfW).
  19. Jean-Olivier Hairault, 2002. "Labor-Market Search and International Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 535-558, July.
  20. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
  21. Timothy Kam & Kirdan Lees & Philip Liu, 2006. "Uncovering The Hit-List For Small Inflation Targeters: A Bayesian Structural Analysis," ANU Working Papers in Economics and Econometrics 2006-473, Australian National University, College of Business and Economics, School of Economics.
  22. Lewis Evans & Arthur Grimes & Bryce Wilkinson, 1996. "Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1856-1902, December.
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