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Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions

Listed author(s):
  • Nicolas Petrovsky-Nadeau

    (Tepper School of Business)

  • Etienne Wasmer

    (Département d'économie)

This paper shows that goods-market frictions drastically change the dynamics of the labor market, bridging the gap with the data both in terms of persistence and volatility. In a DSGE model with three imperfect markets - goods, labor and credit - we find that credit- and goods-market imperfections are substitutable in raising volatility. Goods-market frictions are however unique in generating persistence. The two key mechanisms generating autocorrelation in growth rates and the hump-shaped pattern in the response to productivity shocks are related to the goods market: i) countercyclical dynamics of goods market tightness and prices, which alter future profit flows and raise persistence and ii) procyclical search effort in the goods market, by either consumers, firms or both, raises both amplification and persistence. Expanding our knowledge of goods market frictions is thus needed for a full account of labor market dynamics.

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Paper provided by Sciences Po Departement of Economics in its series Sciences Po Economics Discussion Papers with number 2014-09.

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Date of creation: Feb 2014
Handle: RePEc:spo:wpecon:info:hdl:2441/1787nsa6d1927a90u4bkkombn4
Contact details of provider: Web page: http://econ.sciences-po.fr/
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