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Labor market imperfections, real wage rigidities and financial shocks

  • Nicola Acocella

    ()

    (Department of Methods and Models for Economics, Territory and Finance MEMOTEF, Sapienza University of Rome (Italy))

  • Laura Bisio

    ()

    (Sapienza University of Rome (Italy))

  • Giovanni Di Bartolomeo

    ()

    (University of Teramo)

  • Alessandra Pelloni

    ()

    (University of Rome Tor Vergata (Italy))

By using the recent Gertler and Kiyotaki's (2010) setup, this paper explores the interaction between real distortions stemming from the labor market institutions and financial shocks. We find that neither labor market imperfections nor fiscal institutions determining tax wedges have an impact on the volatility of the real economy induced by a financial shock. By contrast, real wage rigidities matter as they amplify the financial shock effects. Thus, economies with larger imperfections will not systematically observe larger or smaller recessions, unless a causality between imperfections and real wage rigidities is introduced.

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File URL: http://www.memotef.uniroma1.it/sites/dipartimento/files/wpapers/documenti/FullTextWP80.pdf
File Function: March 2011
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Paper provided by Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF in its series Working Papers with number 80/11.

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Handle: RePEc:rsq:wpaper:4/11
Contact details of provider: Web page: http://www.memotef.uniroma1.it/RePEc/index.html

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