From the Great Inflation to the Great Moderation: Assessing the Roles of Firm-Specific Labor, Sticky Prices and Labor Supply Shocks

Maher Khaznaji and Louis Phaneuf

Cahiers de recherche from CIRPEE

Abstract: We develop and estimate a dynamic stochastic general equilibrium model that features sticky prices, a variable elasticity of demand facing firms and firm-specific labor. While reconciling to a good extent the micro and macro evidence on the behavior of prices, the model offers an accurate account of the dramatic increase in macroeconomic stability from the Great Inflation (1948:1-1979:II) to the Great Moderation (1984:I-2006:II). Reminiscent of the evidence in Shapiro and Watson (1988), the paper shows that labor-supply shocks are the key source of the reduction in the volatility of output growth, followed by investment-specific shocks. However, changes in the behavior of the private sector, a less accommodative monetary policy and smaller shocks explain almost evenly the large decline of the variability in inflation.

Keywords: Great moderation; firm-specific labor; variable demand elasticity; nominal price rigidity (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0812

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