The Hiring Frictions and Price Frictions Nexus in Business Cycle Models

Eran Yashiv and Renato Faccini

No 11639, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the interactions between hiring frictions and price frictions in business cycle models. We find that these interactions matter in a significant way for business cycle fluctuations and for labor market outcomes. Using a simple DSGE business-cycle model with Diamond-Mortensen-Pisssarides (DMP) elements, we derive two main results. First, introducing hiring frictions into a New Keynesian model offsets the effects of price frictions. As a result, some business cycle outcomes are actually close to the frictionless New Classical-type outcomes; namely, with moderate hiring frictions the response of employment to technology shocks is positive, and the effects of monetary policy shocks are small, if not neutral. Moreover, it generates endogenous wage rigidity. Second, introducing price frictions into a DMP setting generates amplification of employment and unemployment responses to technology shocks, as well as hump-shaped dynamics. Both results arise through the confluence of frictions. We offer an explanation of the mechanisms underlying them.

Keywords: Hiring frictions; Price frictions; New classical model; Business cycles; Mortensen and pissarides (dmp) model; Technology shocks (search for similar items in EconPapers)
JEL-codes: E22 E24 E32 E52 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: The Hiring Frictions and Price Frictions Nexus in Business Cycles Models (2017)
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