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Factor Complementarity and Labour Market Dynamics

Federico Di Pace and Stefania Villa ()

No 201411, CDMA Working Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, the endogenous mechanisms of the model – factor complementarity, deep habits and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, factor-biased productivity innovations are important exogenous sources of labour market dynamics. Third, demand-side innovations induce markup fluctuations consistent with the deep habits mechanism.

Keywords: CES; Deep Habits; Search and Matching; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E24 E25 E32 J64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2014-11-19
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Journal Article: Factor complementarity and labour market dynamics (2016) Downloads
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