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Labour market imperfections, "divine coincidence" and the volatility of employment and inflation

  • Mirko Abbritti


    (Graduate Institute of International Studies, Geneva)

  • Andrea Boitani


    (DISCE, Università Cattolica, Milan)

  • Mirella Damiani


    (Università di Perugia)

The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state as well as involuntary fluctuations in unemployment. The existence of hiring friction introduces externalities that, in turn, entail the breakdown of the "divine coincidence" without assuming real wage rigidity. Our model with labour market imperfections outperforms the standard NK model as for the persistence of responses to monetary shocks. The model also allows for an analysis of the volatility of economies, differing in their "degrees of labour market rigidity". It turns out that "rigid" economies exhibit less unemployment volatility and more inflation volatility than "flexible" economies.

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Paper provided by Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) in its series DISCE - Quaderni dell'Istituto di Economia e Finanza with number ief0078.

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Length: nn pages 39
Date of creation: Apr 2008
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Handle: RePEc:ctc:serie3:ief0078
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