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A Business Cycle Model with Nominal Wage Contracts and Government

We incorporate nominal wage contracts and government into a quantitative general equilibrium framework. Thus, our model includes three types of shocks: a fiscal shock, a monetary shock and a technology shock. We show that it is possible in this type of environment to generate a low correlation between hours worked and the return to working, a moderately negative correlation between output and aggregate prices and a moderately positive correlation between the real wage and output. In sharp contrast with RBC models with indivisible labor, wage contracts magnify mainly the effect of monetary shocks on the volatility of hours worked. An attractive feature of the contracting model is that it avoids a trade-off that RBC models have to face in their predictive capacity when additional features are incorporated to them. Nous développons un modèle du cycle économique qui contient diverses structures de contrats de salaire nominal et un secteur public. Ceci nous permet d'introduire dans le modèle l'effet possible de trois chocs: un choc sur les dépenses publiques (choc fiscal), un choc monétaire et un choc technologique. Au moyen d'une simulation numérique, nous évaluons la capacité de notre modèle, avec et sans contrats de salaire, à engendrer un ensemble de propriétés statistiques liées à diverses variables agrégées. Nos résultats montrent que le passage de la version d'équilibre du modèle à la version contractuelle peut améliorer substantiellement la prédiction des caractéristiques quantitatives du cycle. Nous montrons également que le modèle avec contrats de salaire peut en principe être exempt d'une faiblesse qui semble caractériser les modèles du cycle d'origine réelle. Toutefois, nous montrons qu'il faut tenir compte des chocs technologiques, en plus des contrats de salaire, pour expliquer les données de façon satisfaisante.

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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 6.

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Length: 39 pages
Date of creation: Oct 1992
Date of revision: Jan 1993
Handle: RePEc:cre:crefwp:6
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  1. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June.
  2. Cho, Jang-Ok & Cooley, Thomas F., 1994. "Employment and hours over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 18(2), pages 411-432, March.
  3. Kydland, Finn E & Prescott, Edward C, 1991. "Hours and Employment Variation in Business Cycle Theory," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 1(1), pages 63-81, January.
  4. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
  5. S. Rao Aiyagari & Lawrence J. Christiano & Martin Eichenbaum, 1990. "The Output, Employment, and Interest Rate Effects of Government Consumption," NBER Working Papers 3330, National Bureau of Economic Research, Inc.
  6. Robert B. Barsky & Gary Solon, 1989. "Real Wages Over The Business Cycle," NBER Working Papers 2888, National Bureau of Economic Research, Inc.
  7. 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).
  8. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
  9. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
  10. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March.
  11. Cooley, T.F. & Ohanian, L.E., 1989. "The Cyclical Behavior Of Prices," RCER Working Papers 188, University of Rochester - Center for Economic Research (RCER).
  12. Finn E. Kydland, 1989. "The role of money in a business cycle model," Discussion Paper / Institute for Empirical Macroeconomics 23, Federal Reserve Bank of Minneapolis.
  13. Gary D. Hansen & Randall Wright, 1992. "The labor market in real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-12.
  14. Jang-Ok Cho, 1990. "Money, Nominal Contracts, and the Business Cycle: I. One-Period Contract Case," Working Papers 790, Queen's University, Department of Economics.
  15. Geary, Patrick T & Kennan, John, 1982. "The Employment-Real Wage Relationship: An International Study," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 854-71, August.
  16. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  17. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-89, August.
  18. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  19. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  20. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  21. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  22. Hansen, G D, 1993. "The Cyclical and Secular Behaviour of the Labour Input: Comparing Efficiency Units and Hours Worked," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 71-80, Jan.-Marc.
  23. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  24. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  25. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December.
  26. repec:cdl:ucsbec:16-90 is not listed on IDEAS
  27. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 82(3), pages 430-50, June.
  28. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  29. 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.
  30. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  31. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18.
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