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Supply shocks, demand shocks, and labor market fluctuations

  • Helge Braun
  • Reinout De Bock
  • Riccardo DiCecio

The authors use structural vector autoregressions to analyze the responses of worker flows, job flows, vacancies, and hours to demand and supply shocks. They identify these shocks by restricting the short-run responses of output and the price level. On the demand side, they disentangle a monetary and nonmonetary shock by restricting the response of the interest rate. The responses of labor market variables are similar across shocks: Expansionary shocks increase job creation, the job-finding rate, vacancies, and hours; and they decrease job destruction and the separation rate. Supply shocks have more persistent effects than demand shocks. Demand and supply shocks are equally important in driving business cycle fluctuations of labor market variables. The authors' findings for demand shocks are robust to alternative identification schemes involving the response of labor productivity at different horizons. Supply shocks identified by restricting productivity generate a higher fraction of impulse responses inconsistent with standard search and matching models.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2009)
Issue (Month): May ()
Pages: 155-178

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Handle: RePEc:fip:fedlrv:y:2009:i:may:p:155-178:n:v.91no.3
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