Divergence in Labor Market Institutions and International Business Cycles

Raquel Fonseca (), Lise Patureau () and Thepthida Sopraseuth

No 2008-14, THEMA Working Papers from THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise

Abstract: This paper investigates the sources of business cycle comovement within the New Open Economy Macroeconomy framework. It sheds new light on the business cycle comovement issue by examining the role of cross-country divergence in labor market institutions. We first document stylized facts supporting that heterogeneous labor market institutions are associated with lower cross-country GDP correlations among OECD countries. We then investigate this fact within a two-country dynamic general equilibrium model with frictions on the good and labor markets. On the good-market side, we model monopolistic competition and nominal price rigidity. Labor market frictions are introduced through a matching function à la Mortensen and Pissarides (1999). Our conclusions disclose that heterogenous labor market institutions amplify the crosscountry GDP differential in response to aggregate shocks. In quantitative terms, they contribute to reduce cross-country output correlation, when the model is subject to real and/or monetary shocks. Our overall results show that taking into account labor market heterogeneity improves our understanding of the quantity puzzle.

Keywords: International business cycle; Search; Labor market institutions; Wage bargaining (search for similar items in EconPapers)
JEL-codes: E24 E32 F41 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Divergence in Labor Market Institutions and International Business Cycles (2009)
Working Paper: Divergence in Labor Market Institutions and International Business Cycles (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2008-14

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