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Shocks and Adjustments

Author

Listed:
  • Daly, Mary C.

    () (Federal Reserve Bank of San Francisco)

  • Fernald, John G.

    () (Federal Reserve Bank of San Francisco)

  • Jordà, Òscar

    () (Federal Reserve Bank of San Francisco)

  • Nechio, Fernanda

    () (Federal Reserve Bank of San Francisco)

Abstract

We develop a multisector model in which capital and labor are free to move across firms within each sector, but cannot move across sectors. To isolate the role of sectoral specificity, we compare our model with otherwise identical multisector economies with either economy-wide factor markets (as in Chari et al. 2000) or firm-specific factor markets (as in Woodford 2005). Sectoral specificity induces within-sector strategic substitutability and across-sector strategic complementarity in price setting. Our model can produce either more or less monetary non-neutrality than those other two models, depending on the distribution of price rigidity across sectors. Under the empirical distribution for the U.S., our model behaves similarly to an economy with firm-specific factors in the short-run, and later on approaches the dynamics of the model with economy-wide factor markets. This is consistent with the idea that factor price equalization might take place gradually over time, so that firm-specificity might be a reasonable short-run approximation, whereas economy-wide markets might be a better description of how factors of production are allocated in the longer run.

Suggested Citation

  • Daly, Mary C. & Fernald, John G. & Jordà, Òscar & Nechio, Fernanda, 2013. "Shocks and Adjustments," Working Paper Series 2013-32, Federal Reserve Bank of San Francisco, revised 01 Jul 2017.
  • Handle: RePEc:fip:fedfwp:2013-32 DOI: 10.24148/wp2013-32
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    References listed on IDEAS

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    Cited by:

    1. repec:cup:macdyn:v:21:y:2017:i:04:p:982-1022_00 is not listed on IDEAS
    2. Elva Bova & Christina Kolerus & Sampawende Tapsoba, 2015. "A fiscal job? An analysis of fiscal policy and the labor market," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-17, December.
    3. Mary C. Daly & John G. Fernald & Òscar Jordà & Fernanda Nechio, 2014. "Labour Markets in the Global Financial Crisis: The Good, the Bad and the Ugly," National Institute Economic Review, National Institute of Economic and Social Research, vol. 228(1), pages 58-64, May.
    4. Mendieta-Muñoz, Ivan, 2017. "On The Interaction Between Economic Growth And Business Cycles," Macroeconomic Dynamics, Cambridge University Press, pages 982-1022.
    5. Robert Anderton & Boele Bonthuis, 2015. "Downward Wage Rigidities in the Euro Area," Discussion Papers 2015-09, University of Nottingham, GEP.

    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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