Accounting for the cyclical dynamics of income shares
Over the business cycle, labor's share of output is negatively but weakly correlated with output, and it lags output by about four quarters. Profit's share is strongly procyclical. It neither leads nor lags output, and its volatility is about four times that of output. Despite the importance of understanding the dynamics of income shares for understanding aggregate technology and the degree of competition in factor markets, macroeconomics lacks models that can account for these dynamics. This paper constructs a model that can replicate those facts. We introduce costly entry of firms in a model with frictional labor markets and find a link between the ability of the model to replicate income shares' dynamics and the ability of the model to amplify and propagate shocks. That link is a countercyclical real interest rate, a well-known fact in U.S. data but a feature that models of aggregate fluctuations have had difficulty achieving.
|Date of creation:||2011|
|Contact details of provider:|| Postal: 1000 Peachtree St., N.E., Atlanta, Georgia 30309|
Web page: http://www.frbatlanta.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Feenstra, Robert C., 2003. "A homothetic utility function for monopolistic competition models, without constant price elasticity," Economics Letters, Elsevier, vol. 78(1), pages 79-86, January.
- Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
- Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-690, September.
When requesting a correction, please mention this item's handle: RePEc:fip:fedawp:2011-09. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Elaine Clokey)
If references are entirely missing, you can add them using this form.