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Productivity, Aggregate Demand and Unemployment Fluctuations

  • Régis Barnichon

This paper presents new empirical evidence on the cyclical behavior of US unemployment that poses a challenge to standard search and matching models. The correlation between cyclical unemployment and the cyclical component of labor productivity switched sign at the beginning of the Great Moderation in the mid 80s: from negative it became positive, while standard search models imply a negative correlation. I argue that the inconsistency arises because search models do not allow output to be demand determined in the short run. I present a search model with nominal rigidities that can rationalize the empirical findings, and I document two new facts about the Great Moderation that can account for the large and swift increase in the unemployment-productivity correlation in the mid-80s.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0819.

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Date of creation: Aug 2007
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Handle: RePEc:cep:cepdps:dp0819
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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