Long-run Unemployment and Macroeconomic Volatility

Stefano Fasani

No 352, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: This paper develops a DSGE model with downward nominal wage rigidity, in which aggregate price and productivity dynamics are exogenously determined by independent Brownian motions with drift. As a result, the long-run expected value of unemployment depends positively on the drift coe¢ cients and negatively on the volatility coe¢ cients of both price and productivity growth processes. Model prescriptions are empirically tested by using a dataset including a wide sample of OECD countries from a period spanning from 1961 to 2011. Panel regressions with fixed effects and time dummies confirm the expected relation of inflation and productivity with unemployment at low frequencies. Long-run unemployment is negatively correlated with the levels of inflation and productivity growth, and positively with their volatilities.

Keywords: Long-run unemployment; Downward Nominal Wage Rigidity; Volatility; In‡ation targeting; DSGE model; Cross-country panel data (search for similar items in EconPapers)
JEL-codes: C23 E12 E24 E31 (search for similar items in EconPapers)
Pages: 39
Date: 2016-10-18, Revised 2016-10-18
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Long-run Unemployment and Macroeconomic Volatility (2017)
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