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Long-run Unemployment and Macroeconomic Volatility

Listed author(s):
  • Stefano, Fasani

This paper develops a DSGE model with downward nominal wage rigidity, in which aggregate price and productivity dynamics are exogenously determined by independent Brownian motions with drift. As a result, the long-run expected value of unemployment depends positively on the drift coe¢ cients and negatively on the volatility coe¢ cients of both price and productivity growth processes. Model prescriptions are empirically tested by using a dataset including a wide sample of OECD countries from a period spanning from 1961 to 2011. Panel regressions with fixed effects and time dummies confirm the expected relation of inflation and productivity with unemployment at low frequencies. Long-run unemployment is negatively correlated with the levels of inflation and productivity growth, and positively with their volatilities.

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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 352.

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Length: 39
Date of creation: 18 Oct 2016
Date of revision: 18 Oct 2016
Handle: RePEc:mib:wpaper:352
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