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Aggregate Employment, Real Business Cycles, and Superior Information

We test whether dynamic, stochastic, general equilibrium artificial economies associated with several labor market institutions provide an adequate characterization of aggregate employment volatility and dynamics. Our test is robust to possible misspecifications about the information set used by economic agents to forecast future events. Accounting for the agents' superior information, we find that the divisible labor, indivisible labor, and labor hoarding structures replicate employment volatility, in contrast to the nominal wage contracts and labor adjustment costs structures. Also, the labor hoarding structure provides a substantially better account of employment dynamics than the other labor market structures.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 55.

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Length: 34 pages
Date of creation: Dec 1997
Date of revision:
Handle: RePEc:cre:crefwp:55
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  1. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  2. Cho, J.O. & Cooley, T.F., 1991. "The Business Cycle with Nominal Contracts," RCER Working Papers 260, University of Rochester - Center for Economic Research (RCER).
  3. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 245-73, April.
  4. Evans, Charles L., 1992. "Productivity shocks and real business cycles," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 191-208, April.
  5. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  6. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
  7. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 24, Federal Reserve Bank of Minneapolis.
  8. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  9. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
  10. Michel Normandin, 1994. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Cahiers de recherche CREFE / CREFE Working Papers 31, CREFE, Université du Québec à Montréal.
  11. Craig Burnside & Martin Eichenbaum, 1994. "Factor Hoarding and the Propagation of Business Cycles Shocks," NBER Working Papers 4675, National Bureau of Economic Research, Inc.
  12. Hansen, Lars Peter & Sargent, Thomas J., 1982. "Instrumental variables procedures for estimating linear rational expectations models," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 263-296.
  13. Campbell, John Y & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 357-73, July.
  14. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  15. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  16. Ingram, Beth Fisher & Kocherlakota, Narayana R. & Savin, N. E., 1994. "Explaining business cycles: A multiple-shock approach," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 415-428, December.
  17. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
  18. 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.
  19. Jang-Ok Cho, 1993. "Money and Business Cycle with One-Period Nominal Contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 638-59, August.
  20. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, vol. 85(3), pages 492-511, June.
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