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Assessing the empirical relevance of Walrasian labor frictions to business cycle fluctuations

  • Joao Madeira

    (Department of Economics, University of Exeter)

This paper describes and estimates (with a Bayesian likelihood approach) an otherwise standard dynamic stochastic general equilibrium model, with both sticky prices and wages, augmented with several labor market rigidities (of a Walrasian nature), namely: indivisible labor, predetermined straight time employment numbers (in which case, firms adjust overtime employment to respond to unexpected shocks), hiring expenses and convex adjustment costs. The results show all these frictions to be empirically important. Labor frictions are shown to have important implications to business cycle dynamics and economic policy making. Labor frictions imply TFP shocks have a greater role in accounting for business cycle dynamics. Labor frictions also imply fiscal policy to lead to a greater crowding out of private sector activity and monetary policy to be more e¤ective in achieving disinflation.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1304.pdf
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Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1304.

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Date of creation: 2013
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Handle: RePEc:exe:wpaper:1304
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  1. Jean-Pierre Danthine & Andre Kurmann, 2004. "Fair Wages in a New Keynesian Model of the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 107-142, January.
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  3. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  4. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
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  6. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
  7. Peter N. Ireland, 2004. "Technology Shocks in the New Keynesian Model," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 923-936, November.
  8. Walsh, Carl E., 2003. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Santa Cruz Center for International Economics, Working Paper Series qt6tg550dv, Center for International Economics, UC Santa Cruz.
  9. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  10. Matthew D. Shapiro, 1986. "The Dynamic Demand for Capital and Labor," NBER Working Papers 1899, National Bureau of Economic Research, Inc.
  11. Hall, George J., 1996. "Overtime, effort, and the propagation of business cycle shocks," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 139-160, August.
  12. Hansen, Gary D. & Sargent, Thomas J., 1988. "Straight time and overtime in equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 281-308.
  13. Lucas, Robert E, Jr, 1970. "Capacity, Overtime, and Empirical Production Functions," American Economic Review, American Economic Association, vol. 60(2), pages 23-27, May.
  14. 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.
  15. Nir Jaimovich & Sergio Rebelo, 2007. "News and Business Cycles in Open Economies," Discussion Papers 07-016, Stanford Institute for Economic Policy Research.
  16. Chang, Yongsung & Doh, Taeyoung & Schorfheide, Frank, 2005. "Non-stationary Hours in a DSGE Model," CEPR Discussion Papers 5232, C.E.P.R. Discussion Papers.
  17. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
  18. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  19. João Madeira, 2014. "Overtime Labor, Employment Frictions, and the New Keynesian Phillips Curve," The Review of Economics and Statistics, MIT Press, vol. 96(3), pages 767-778, October.
  20. Batini, Nicoletta & Jackson, Brian & Nickell, Stephen, 2005. "An open-economy new Keynesian Phillips curve for the U.K," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1061-1071, September.
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