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Endogenous business cycle propagation and the persistence problem: The role of labor-market frictions

Steven Ambler (), Alain Guay () and Louis Phaneuf

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 1, 47-62

Abstract: Contrasting sharply with a recent trend in DSGE modeling, we propose a business cycle model where frictions and shocks are chosen with parsimony. The model emphasizes a few labor-market frictions and shocks to monetary policy and technology. The model, estimated from U.S. quarterly postwar data, accounts well for important differences in the serial correlation of the growth rates of aggregate quantities, the size of aggregate fluctuations and key comovements, including the correlation between hours and labor productivity. Despite its simplicity, the model offers an answer to the persistence problem (Chari et al., 2000) that does not rely on multiple frictions and adjustment lags or ad hoc backward-looking components. We conclude modern DSGE models need not embed large batteries of frictions and shocks to account for the salient features of postwar business cycles.

Keywords: Business cycle propagation; Persistence problem; Sticky wages; Costly labor adjustment (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2012
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