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Aggregate labor market fluctuations under news shocks

Ningru Zhao, Yukun Shi, Yang Sun and Jiaming Miao

Economic Modelling, 2020, vol. 90, issue C, 397-405

Abstract: The standard RBC model fails to replicate the relationship between aggregate hours worked and average productivity. We propose a DSGE model that incorporates habit formation preferences, capital adjustment costs, and news shocks to solve the puzzle implied in the standard RBC model with only technological shocks. The aggregate labor supply curve is shifted due to the wealth effect caused by the variation of consumption under a news shock. Moreover, capital adjustment costs help amplify the variation of consumption, and thus the movement of the aggregate labor supply curve under the news shock. Also, the aggregate demand curve will be shifted, as it operates in the standard RBC model after the realization of the news shock. As a result of the joint movement of the aggregate labor supply curve and aggregate labor demand curve under the news shock, the model achieves a relationship quite close to the empirically observed relationship.

Keywords: Aggregate hours worked; Average productivity; Aggregate labor supply and demand curve; Habit formation; Capital adjustment costs; News shocks (search for similar items in EconPapers)
JEL-codes: E24 E32 E37 J20 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2019.12.018

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