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Are turbulences of Sargent and Ljungqvist consistent with lower aggregate volatility?

  • Anna Batyra

    (Catholic University of Louvain)

Sargent and Ljungqvist (1998, 2005, 2006a, 2006b) impute the persis- tence of long term unemployment in Europe since 80s to the welfare state's inability to cope with more turbulent times. They claim that global eco- nomic conditions have been more turbulent in 80s and 90s, comparing to earlier decades, and construct a model based on search with a turbulence at micro level to reproduce the evolution of unemployment in laissez-faire and welfare economies. Plethora of research, among others Stock and Watson (2002, 2003, 2005), document on the other hand a fall in aggregate volatility of macro series in the US and G7 countries since 80s. We attempt to reconcile these two findings. Can the model of Sargent and Ljungqvist (1998) based on micro turbulence be consistent with macro data? We look at macro series of productivity and real wages (plus GDP and employment) for a number of countries and find a decline in aggregate volatility since 80s. We then generate macro series based on Sargent and Ljungqvist (1998) search model and establish what sort of aggregate volatility it predicts for welfare and laissez-faire economies under different degrees of turbulence, and find that it is potentially consistent with macro data.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 413.

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Date of creation: 2007
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Handle: RePEc:red:sed007:413
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