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Labour Market Modelling within a DSGE Approach

Author

Listed:
  • Jaromir Tonner
  • Stanislav Tvrz
  • Osvald Vasicek

Abstract

The goal of this paper is to find a suitable way of modelling the main labour market variables in the framework of the CNB's core DSGE model. The model selection criteria are: the predictive ability for unemployment, the change in the overall predictive ability in comparison to the baseline model and the extent of the required model change. We find that the incorporation of a modified Gali, Smets and Wouters (2011) labour market specification allows us to predict unemployment with an acceptable forecast error. At the same time it leads to a moderate improvement in the overall predictive ability of the model and requires only minor adjustments to the model structure. Thus, it should be preferred to more complicated concepts that yield a similar improvement in predictive ability. We also came to the conclusion that the concept linking unemployment and the GDP gap is promising. However, its practical application would require (additional) improvement in the accuracy of the consumption prediction. As a practical experiment, we compare the inflation pressures arising from nominal wages and the exchange rate in the baseline model and in alternative specifications. The experiment is motivated by the use of the exchange rate as an additional monetary policy instrument by the CNB since November 2013 in an environment of near-zero interest rates and growing disinflationary pressures. We find that the baseline model tends to forecast higher nominal wage growth and lower exchange rate depreciation than the models with more elaborate labour markets. Therefore, the alternative models would probably have identified an even higher need for exchange rate depreciation than the baseline model did.

Suggested Citation

  • Jaromir Tonner & Stanislav Tvrz & Osvald Vasicek, 2015. "Labour Market Modelling within a DSGE Approach," Working Papers 2015/06, Czech National Bank.
  • Handle: RePEc:cnb:wpaper:2015/06
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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/cnbwp_2015_06.pdf
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    References listed on IDEAS

    as
    1. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2011. "Introducing financial frictions and unemployment into a small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 1999-2041.
    2. Michal Andrle & Tibor Hledik & Ondra Kamenik & Jan Vlcek, 2009. "Implementing the New Structural Model of the Czech National Bank," Working Papers 2009/2, Czech National Bank.
    3. Christoffel, Kai & Costain, James & de Walque, Gregory & Kuester, Keith & Linzert, Tobias & Millard, Stephen & Pierrard, Olivier, 2009. "Inflation dynamics with labour market matching: assessing alternative specifications," Working Paper Series 1053, European Central Bank.
    4. Christoffel, Kai & Kuester, Keith, 2008. "Resuscitating the wage channel in models with unemployment fluctuations," Working Paper Series 923, European Central Bank.
    5. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. repec:vrs:reoecp:v:18:y:2018:i:3:p:225-259:n:1 is not listed on IDEAS
    2. Jan Bruha & Jaromir Tonner, 2018. "An Exchange Rate Floor as an Instrument of Monetary Policy: An Ex-Post Assessment of the Czech Experience," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(6), pages 537-549, December.
    3. Georgiadis, Georgios & Jančoková, Martina, 2017. "Financial globalisation, monetary policy spillovers and macro-modelling: tales from 1001 shocks," Working Paper Series 2082, European Central Bank.
    4. Jan Babecky & Kamil Galuscak & Diana Zigraiova, 2015. "Labour Market Adjustment since the Global Financial Crisis: Evidence from a Survey of Czech Firms," Research and Policy Notes 2015/01, Czech National Bank.
    5. Michal Franta & Tomas Holub & Branislav Saxa, 2018. "Balance Sheet Implications of the Czech National Bank's Exchange Rate Commitment," Working Papers 2018/10, Czech National Bank.

    More about this item

    Keywords

    DSGE; labour market; Nash bargaining; right to manage;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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