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Nominal Wage Contracts, Labor Adjustment Costs and the Business Cycle

  • Zuzana Janko

    (University of Calgary)

Previous work of monetary dynamic stochastic general equilibrium models with nominal rigidity a la Taylor, particularly the Cho-Cooley model, was abandoned in favor of the New-Keynesian analysis due to the model's failure to deliver business cycle statistics that match the U.S. economy along some key dimensions. In this paper, we take a step in revitalizing the Cho-Cooley avenue of research. We add empirically plausible labor adjustment costs (LAC) into a model with nominal wage rigidity and find that with LAC our model is able to overcome some of the shortcomings otherwise present in the Cho-Cooley framework, specifically high standard deviations of real variables and a countercyclical productivity. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.08.004
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 11 (2008)
Issue (Month): 2 (April)
Pages: 434-448

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Handle: RePEc:red:issued:06-23
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