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Labor wedges and open economy puzzles

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  • Karabarbounis, Loukas

Abstract

A parsimonious model with home production, estimated to match moments of the “labor wedge,” explains prominent puzzles of the international business cycle. If market and home activity are substitutes, then the measured labor wedge increases whenever market consumption and employment decrease. Home production breaks the tight negative link between market consumption and its marginal utility and therefore helps explain the international risk sharing puzzle. In an estimated two-country dynamic general equilibrium model in which the labor wedge is endogenously generated to match its empirical moments, market output and market employment are more correlated than market consumption and investment across countries, relative market consumption is negatively related to the real exchange rate and real net exports are countercyclical. Further, the international risk sharing puzzle becomes easier to explain as the degree of financial completeness increases.

Suggested Citation

  • Karabarbounis, Loukas, 2010. "Labor wedges and open economy puzzles," MPRA Paper 31370, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:31370
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    File URL: https://mpra.ub.uni-muenchen.de/31561/1/MPRA_paper_31561.pdf
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Labor wedges and open economy puzzles
      by Christian Zimmermann in NEP-DGE blog on 2011-06-20 04:27:30

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    Cited by:

    1. Kyriacos Lambrias, 2013. "News Shocks, Real Exchange Rates and International Co-Movements," BCL working papers 83, Central Bank of Luxembourg.
    2. Gianluca Benigno & Hande Küçük, 2012. "Portfolio allocation and international risk sharing," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 535-565, May.
    3. Mark A. Aguiar & Erik Hurst & Loukas Karabarbounis, 2011. "Time Use During Recessions," NBER Working Papers 17259, National Bureau of Economic Research, Inc.
    4. Lambrias, Kyriacos, 2016. "Real exchange rates and international co-movement: news-shocks and non-tradable goods with complete markets," Working Paper Series 1946, European Central Bank.
    5. Anton A. Cheremukhin, 2011. "Labor matching: putting the pieces together," Working Papers 1102, Federal Reserve Bank of Dallas.
    6. Mileva, Mariya, 2013. "Optimal monetary policy in response to shifts in the beveridge curve," Kiel Working Papers 1823, Kiel Institute for the World Economy (IfW).

    More about this item

    Keywords

    Labor Wedge; Home Production; International Business Cycles; Risk Sharing;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F3 - International Economics - - International Finance
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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