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Dynamic Response To Monetary Shocks In A Search Model Of The Labor Market

  • Alvaro J. Riascos


This paper studies the dynamic response of a few key macroeconomic variables to each one of three exogenous shocks: monetary, government spending and technological shocks. By using a cash in advance model with two market frictions, one in the intermediation of loanable funds, and one in the labor market, we address the ability of the model to simulate data embedded with the same dynamic response to shocks observed in historical data (i.e we estimate dynamic multipliers to exogenous shocks by estimating a VARX model to both sets of data). We find evidence on the short run expansionary effects of monetary policy and we highlight the importance of studyng the real interest rate dynamics as opposed to the nominal interest rate. In terms of the former we do observe a coutercyclical movement of money and interest rates, while in term of the latter, we don't. We also find a good performance of the model in tracing out the dynamic response of output after any one of the three shocks. Investment and employment dynamics are well reproduced when the economy is subject to government spending or technological shocks. We make a case for using this particular validation technique as a complementary alternative for testing the performance of calibrated dynamic general equilibrium models

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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 002385.

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Length: 32
Date of creation: 30 Nov 2002
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Handle: RePEc:col:000094:002385
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  1. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report 227, Federal Reserve Bank of Minneapolis.
  3. Cheron, Arnaud & Langot, Francois, 2000. "The Phillips and Beveridge curves revisited," Economics Letters, Elsevier, vol. 69(3), pages 371-376, December.
  4. Blanchard, J.O., 1989. "The Aggregate Matching Function," Working papers 538, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Working Paper Series, Macroeconomic Issues 90, Federal Reserve Bank of Chicago.
  6. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  7. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October.
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