Labor market frictions and the international propagation mechanism

Lise Patureau ()

Journal of Macroeconomics, 2012, vol. 34, issue 1, 199-222

Abstract: The paper studies the role of labor market frictions in accounting for international business cycle comovement. To this aim, we embed labor market search and matching frictions in a two-country New Keynesian model. We show that labor market frictions amplify the international propagation of supply and demand shocks. In terms of cyclical properties then, they raise the cross-country output correlation. Adding labor market search in the New Keynesian model thus improves its ability to account for the business cycle comovement observed in G7 countries in the recent decades. Nominal wage rigidity substantially contributes to this result. Labor market institutions also play a role. Yet, their impact is not unequivocal depending on the institution considered. Business cycle synchronization is thus found to increase with the generosity of the unemployment benefits system, whereas it decreases with the strictness of employment protection.

Keywords: International business cycles; Labor market search and matching; Labor market institutions; Wage bargaining; International transmission of shocks (search for similar items in EconPapers)
JEL-codes: E24 E32 F41 F42 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Labor Market Frictions and the International Propagation Mechanism (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:34:y:2012:i:1:p:199-222

DOI: 10.1016/j.jmacro.2011.09.006

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