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Divergence in Labor Market Institutions and International Business Cycles

  • Raquel Fonseca

    ()

    (RAND, 1776 Main Street P.O. Box 2138 Santa Monica, CA 90407-2138, USA)

  • Lise Patureau

    ()

    (THEMA Université de Cergy-Pontoise, 33, boulevard du Port 95011 Cergy-Pontoise Cedex, France)

  • Thepthida Sopraseuth

    ()

    (EPEE Université d’Evry and PSE, 4 Bd F. Mitterand, 91025 Evry Cedex, France)

This paper investigates the sources of business cycle comovement within the New Open Economy Macroeconomy framework. It sheds new light on the business cycle comovement issue by examining the role of cross-country divergence in labor market institutions. We first document stylized facts supporting that heterogeneous labor market institutions are associated with lower cross-country GDP correlations among OECD countries. We then investigate this fact within a two-country dynamic general equilibrium model with frictions on the good and labor markets. On the good-market side, we model monopolistic competition and nominal price rigidity. Labor market frictions are introduced through a matching function à la Mortensen and Pissarides (1999). Our conclusions disclose that heterogenous labor market institutions amplify the crosscountry GDP differential in response to aggregate shocks. In quantitative terms, they contribute to reduce cross-country output correlation, when the model is subject to real and/or monetary shocks. Our overall results show that taking into account labor market heterogeneity improves our understanding of the quantity puzzle.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-14.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-14
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