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Dynamic response to monetary shocks in a search model of the labor market

  • Álvaro Riascos

    ()

This paper studies the dynamic response of a few key macroeconomic variables to each one of three exogenous shocks: monetary, government spending and technological shocks. By using a cash in advance model with two market frictions, one in the intermediation of loanable funds, and one i the labor market, we address the ability of the model to simulate data embedded with the same dynamic response to shocks observed in historical data(i.e we estimate dynamic multipliers to exogenous shocks by estimating a VARX model to both sets of data). We find evidence on the short run expasionary effects of monetary policy and we highlight the importance of studying the real interest rate dynamics as opposed to the nominal interest rate. In terms of the former we do observe a countercyclical movement of money and interest rates, while in term of the latter, we don´t. We also find a good performance of the model in tracing out the dynamic response of output after any one of the three shocks. Investment and employment dynamics are well reproduced when the economy is subject to government spending or technological shocks. We make a case for using this particular validation technique as a complementary alternative for testing the performance of calibrated dynamic general equilibrium models.

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Article provided by UNIVERSIDAD DEL ROSARIO in its journal REVISTA DE ECONOMÍA DEL ROSARIO.

Volume (Year): (2002)
Issue (Month): ()
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Handle: RePEc:col:000151:002386
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  1. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Working Paper Series, Macroeconomic Issues WP-96-28, Federal Reserve Bank of Chicago.
  3. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  4. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 24, Federal Reserve Bank of Minneapolis.
  5. Olivier Jean Blanchard & Peter A. Diamond, 1989. "The Aggregate Matching Function," NBER Working Papers 3175, National Bureau of Economic Research, Inc.
  6. Chéron, A. & Langot, François, 1999. "The Phillips and Beveridge curves revisited," CEPREMAP Working Papers (Couverture Orange) 9905, CEPREMAP.
  7. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
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