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Bargaining Shocks and Aggregate Fluctuations

Thorsten Drautzburg, Jesus Fernandez-Villaverde () and Pablo Guerron-Quintana

No 20-11, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We argue that social and political risk causes significant aggregate fluctuations by changing bargaining power. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output and unemployment. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector and we back out the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 28% of aggregate fluctuations and have a welfare cost of 2.4%in consumption units.

Keywords: bargaining shocks; partial filter; aggregate fluctuations; histor-ical narrative.; Redistribution risk (search for similar items in EconPapers)
JEL-codes: E32 E44 J20 E37 (search for similar items in EconPapers)
Pages: 47
Date: 2020-03-12, Revised 2020-03-12
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:87610

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DOI: 10.21799/frbp.wp.2020.11

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