Assessing the Relationship between Economic Stability and Dynamic Employment Responses to Aggregate Shocks: Working Paper 2007-04
No 18422, Working Papers from Congressional Budget Office
Previous studies have identified a significant drop in the volatility of the U.S. GDP and other measures of aggregate activity since the mid-1980s. Yet uncertainty remains as to whether the reduced size and frequency of macroeconomic shocks, or the economyâ€™s reduced responses to shocks, are producing aggregate economic stability. To investigate this issue, this paper looks at the changes in aggregate employment responses to shocks. Using an interrelated factor demand model, this paper finds that the monthly employment elasticity to unanticipated demand shocks has declined
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