Assessing the empirical relevance of labor frictions to business cycle fluctuations

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This paper describes a DSGE model augmented with labor frictions, namely: indivisible labor, predetermined employment and adjustment costs. This improves the fit to the data as shown by a higher log marginal likelihood and closer match to key business cycle statistics. The labor frictions introduced are relevant for model dynamics and economic policy: the effect of TFP shocks on most macroeconomic variables is substantially mitigated; fiscal policy leads to a greater crowding out of private sector activity and monetary policy has a lower impact on output. Labor frictions also provide a better match to impulse response functions from VAR models.
Original languageEnglish
Pages (from-to)1-21
Number of pages21
JournalOxford Bulletin of Economics and Statistics
Early online date31 Oct 2017
Publication statusE-pub ahead of print - 31 Oct 2017

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© 2017 The Department of Economics, University of Oxford and John Wiley & Sons Ltd. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details.

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