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The Hiring Frictions and Price Frictions Nexus in Business Cycles Models

Eran Yashiv and Renato Faccini ()
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Eran Yashiv: Tel Aviv University

No 464, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We study the interactions between hiring frictions and price frictions in business cycle models. We find that this interaction matters in a significant way for business cycle fluctuations and for labor market outcomes. Using a simple DSGE business-cycle model with Diamond-Mortensen-Pisssarides (DMP) elements, we derive two main results. First, introducing hiring frictions into a New Keynesian model offsets the effects of price frictions. As a result, some business cycle outcomes are actually close to the frictionless New Classical-type outcomes; namely, with moderate hiring frictions the response of employment to technology shocks is positive, and the effects of monetary policy shocks are small, if not neutral. Moreover, it generates endogenous wage rigidity. Second, introducing price frictions into a DMP setting generates amplification of employment and unemployment responses to technology shocks, as well as hump-shaped dynamics. Both results arise through the confluence of frictions. We offer an explanation of the mechanisms underlying them.

New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2017
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Working Paper: The Hiring Frictions and Price Frictions Nexus in Business Cycle Models (2016) Downloads
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