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Accounting for the Cyclical Dynamics of Income Shares

  • Pedro Silos

    (Federal Reserve Bank of Atlanta)

  • Enchuan Shao

    (Bank of Canada)

Over the business cycle, labor's share of output is negatively but weakly correlated with output, and it lags output by about four quarters. Profits' share is strongly pro-cyclical, 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 those 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 that there is 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 US data but a feature that models of aggregate fluctuations have had difficulty achieving.

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File URL: https://www.economicdynamics.org/meetpapers/2011/paper_1078.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1078.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1078
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  1. 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.
  2. Shigeru Fugita & Garey Ramey, 2006. "Job matching and propagation," Working Papers 06-13, Federal Reserve Bank of Philadelphia.
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