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Factor Complementarity and Labour Market Dynamics

Listed author(s):
  • Federico di Pace

    (University of St Andrews)

  • Stefania Villa

    (KU Leuven & University of Foggia)

We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, the endogenous mechanisms of the model – factor complementarity, deep habits and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, factor-biased productivity innovations are important exogenous sources of labour market dynamics. Third, demand-side innovations induce markup fluctuations consistent with the deep habits mechanism.

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File URL: http://www.st-andrews.ac.uk/~wwwecon/repecfiles/2/1411.pdf
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201411.

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Date of creation: 19 Nov 2014
Handle: RePEc:san:cdmawp:1411
Contact details of provider: Postal:
School of Economics and Finance, University of St. Andrews, Fife KY16 9AL

Phone: 01334 462436
Fax: 01334 462444
Web page: https://www.st-andrews.ac.uk/cdma
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