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Sticky wages and sectoral labor comovement

  • DiCecio, Riccardo

A defining feature of business cycles is the comovement of inputs at the sectoral level with aggregate activity. Standard models cannot account for this phenomenon. This paper develops and estimates a two-sector dynamic general equilibrium model that can account for this key regularity. My model incorporates three shocks to the economy: monetary policy shocks, neutral technology shocks, and embodied technology shocks in the capital-producing sector. The estimated model is able to account for the response of the U.S. economy to all three shocks. Using this model, I argue that the key friction underlying sectoral comovement is rigidity in nominal wages.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 3 (March)
Pages: 538-553

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:3:p:538-553
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