labor market institutions and inflation volatility in the euro area despite having had the same currency for many years emu countries still have quite different inflation dynamics in this paper we explore one possible reason country specific labor market institutions giving rise to different inflation volatilities when unemployment insurance schemes differ as they do in emu reservation wages react differently in each country to area wide shocks this implies that real marginal costs and inflation also react differently we report evidence for emu countries supporting the existence of a cross country link over the cycle between labor market structures on the one side and real wages and inflation on the other we then build a dsge model that replicates the data evidence the inflation volatility differentials produced by asymmetric labor markets generate welfare losses at the currency area level of approximately 0 3 of steady state consumption

efficiency and equalization payments in a federal system of government a synthesis and extensions of recent results this paper investigates the rationale for a system of equalization transfers in a federal system of government the existing sources of inefficiency of resource allocation in economies with more than one level of government are synthesized in the framework of a simple decentralized multiprovince model with mobile factors of production the sources of inefficiency arise first because migrants respond at the margin to incorrect signals owing to the phenomena of rent sharing and fiscal exterality and second because of global rather than local inefficiencies the model is then extended to consider the role of the federal government in providing intergovernmental transfers in the face of such inefficiencies in addition to synthesizing the sources of inefficiency in federal models the equity arguments for equalization are briefly recounted efficacite et paiements de perequation dans un systeme federal de gouvernement synthese et extensions de certains resultats recents ce memoire examine la logique qui soustend un systeme de paiements de perequation dans un systeme fdderal de gouverement les auteurs utilisent un modele simple d un systeme multi provincial decentralise avec des facteurs de production mobiles pour definir les sources d inefficacite dans l allocation des ressources dans les dconomies qui possedent plus d un niveau de gouvernement ces inefficacites proviennent de ce que d abord ceux qui se deplacent le font en reponse a la marge a des signaux incorrects engendres par le partage de la rente sur la base de la residence et par les phenomenes d exteralites fiscales elles sont aussi le resultat d inefficacites globales plutot que locales dans le cadre de ce modele les auteurs analysent le role du gouvernement federal effectuant des transferts inter gouverementaux pour corriger ces inefficacites en plus de presenter une synthese des sources d inefficacite dans les regimes federaux les auteurs font un bref rappel en passant a l ensemble des arguments fondes sur l equite qu on utilise pour rationaliser les paiements de perequation this paper is a linear combination of two papers presented at the may 1982 meetings of the canadian economics association in halifax entitled the case for equalization payments by the authors and recent developments in the theory of regional economic policy in canada by boadway the authors are grateful for comments by the discussants jim johnson and baxter macdonald and by jack mintz brian scarfe gerard belanger david sewell tom courchene and the referees we are especially heavily indebted to dan usher for many stimulating comments and suggestions while the work was in progress some of the above persons will undoubtedly disagree with the emphasis we have chosen to put on various aspects of the analysis for policy purposes support for some of this work has been provided by the economic council of canada and is gratefully acknowledged canadian journal of economics revue canadienne d economique xv no 4 november novembre 1982 printed in canada imprimd au canada 0008 4085 82 0000 0613 01 50 1982 canadian economics association this content downloaded from 207 46 13 127 on wed 12 oct 2016 04 27 47 utc all use subject to http about jstor org terms 614 robin boadway and frank flatters

the ir relevance of real wage rigidity in the new keynesian model with search frictions we explore the role of real wage dynamics in a new keynesian business cycle model with search and matching frictions in the labor market both job creation and destruction are endogenous we show that the model generates counterfactual inflation and labor market dynamics in particular it fails to generate a beveridge curve vacancies and unemployment are positively correlated introducing real wage rigidity leads to a negative correlation and increases the magnitude of labor market flows to more realistic values however inflation dynamics are only weakly affected by real wage rigidity this is because of the presence of labor market frictions which generate long run employment relationships the measure of real marginal cost that is relevant for inflation dynamics via the phillips curve contains a dynamic component that does not necessarily move with real wages

the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

vacancies unemployment and the phillips curve abstract the canonical new keynesian phillips curve has become a standard component of models designed for monetary policy analysis however in the basic new keynesian model there is no unemployment all variation in labor input occurs along the intensive hours margin and the driving variable for inflation depends on workers marginal rates of substitution between leisure and consumption in this paper we incorporate a theory of unemployment into the new keynesian theory of inflation and empirically test its implications for inflation dynamics we show how a traditional phillips curve linking inflation and unemployment can be derived and how the elasticity of inflation with respect to unemployment depends on structural characteristics of the labor market such as the matching technology that pairs vacancies with unemployed workers we estimate on us data the phillips curve generated by the model while we can reject the baseline new keynesian phillips curve in favor of the search frictions specification we show it is still too stylized to fully describe the dynamics of firms marginal costs

the return of the wage phillips curve the standard new keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment under some assumptions that relation takes a form similar to that found in empirical applications starting with the original phillips 1958 curve and may thus be viewed as providing some theoretical foundations to the latter the structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the u s economy even under the strong assumption of a constant natural rate of unemployment

reassessment of the tiebout model abstract the tiebout model has been the reference point for the classical approach to fiscal federalism its emphasis on mobility benefit taxation and the advantages of fiscal competition have informed fiscal federalism since the seminal contributions of musgrave and oates this paper reviews the influence that the tiebout model has had on fiscal federalism and argues that while its insights remain relevant for local government it is far from compelling as a positive description of or a normative prescription for fiscal federalism at the state level some aspects of alternative approaches are presented which lead to different perspectives than tiebout inspired ones

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

ex post redistribution in a federation implications for corrective policy abstract this paper analyzes whether changes in the timing of equalizing transfers to state governments necessitate an adjustment in federal corrective policy according to the existing literature assuming an ex ante choice of transfers the corrective grant is equal to the marginal damage benefit inflicted by externality generation when the federal government accommodates state finances ex post the grant differs in formula from existing prescription allocative federal policy corrects state policy incentives twofold it entails a correction for the distortion in the marginal benefit of state spending as in earlier literature and for the distortion in the marginal cost of public funds induced by the ex post provision of transfers the required grant rule is generically disproportionate to the equilibrium externality even with lump sum taxation furthermore the ex post provision of transfers is critical for the nature of the equilibrium inefficiency equalizing transfers at least partly internalize consumption spill overs but simultaneously establishes a new source of inefficiency as a final result the existing prescription for allocative federal policy continues to apply if the public good is pure

fiscal expansions unemployment and labor force participation theory and evidence structural vars indicate that for many oecd countries labor force participation employment and the unemployment rate significantly increase following increases in government expenditures under a variety of specifications and identification schemes fiscal expansions also tend to increase real wages existing models have difficulties in generating such responses we show that the empirical regularities can be reproduced with two additions into a standard new keynesian model with matching frictions a a labor force participation choice and b workers heterogeneity

long run inflation and the distorting effects of sticky wages and technical change we show that the calvo price setting model is not necessarily inconsistent with evidence of a weak relation between positive trend inflation and price dispersion we identify the interaction between sticky wages and technical change as factors disrupting the allocative role of the wage system under positive trend inflation in turn this interaction generates inefficient wage dispersion as opposed to price dispersion which fuels inflation costs we conclude that it is too early to dismiss the new keynesian model as a useful vehicle to assess the costs of inflation

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

investment matching and persistence in a modified cash in advance economy abstract we simulate and estimate a new keynesian search and matching model with sticky wages in which capital has to be financed with cash at least partially our objective is to assess the ability of this framework to account for the persistence of output and inflation observed in the data we find that our setup generates enough output and inflation persistence with standard stickiness parameters the key factor driving these results is the inclusion of investment in the cia constraint rather than any other nominal or real rigidity the model reproduces labor market dynamics after a positive increase in productivity hours fall nominal wages hardly react and real wages go up with some delay regarding money supply shocks we investigate the conditions under which our model specification generates the liquidity effect a fact which is absent in most sticky price models

the effect of macroeconomic news on stock returns new evidence from newspaper coverage abstract previous literature has produced weak evidence to support the hypothesis that real economic news affects stock returns this is in part attributed to the difficulty of measuring how investors interpret macroeconomic announcements in different economic environments in this paper we choose a different approach of measuring macroeconomic news to better estimate its effect on stock returns since newspaper stories provide an interpretation of the statistical releases we choose newspaper stories as our measure of news our findings indicate that news about gdp and unemployment does affect stock returns

cross country differences in unemployment fiscal policy unions and household preferences in general equilibrium we develop a five period overlapping generations model with individuals who differ by ability and with an imperfect labour market union wage setting for the individuals of lower ability the model explains human capital formation hours worked and unemployment within one coherent framework its predictions match the differences in the unemployment rate across 12 oecd countries remarkably well a shapley decomposition of these differences reveals an almost equal role for fiscal policy variables and union preferences as to fiscal policy differences in unemployment benefits play a much more important role than tax differences differences in households taste for leisure are unimportant

understanding unemployment flows this article reviews the current state of research on unemployment dynamics in macroeconomic models in particular it discusses the increasingly widespread use of the labour market flow approach as implemented via a search and matching process and presents main policy considerations that arise from this approach related to unemployment benefit systems and employment protection it reviews the implications of the labour flow approach for dynamic properties of macroeconomic models and discusses policy implications for macroeconomic and labour market policies finally it presents new evidence on the effectiveness of policies to influence unemployment in and outflows copyright 2011 oxford university press

optimality free mobility and the regional authority in a federation abstract this paper examines the efficiency properties of a federation characterized by strategically competing regions and freely mobile homogeneous individuals analyses of this economy have concluded that achieving a pareto optimal will require intervention by a national authority this paper makes one basic point the nash equilibrium of regional authority behavior is pareto optimal the implication is that there is no role for a national authority in either providing interregional transfers or correcting for decentralized provision of public goods the nash equilibrium involves samuelson public goods provision and regions purchasing preferred population distributions with optimal interregional transfers

do matching frictions explain unemployment not in bad times this paper models unemployment as the result of matching frictions and job rationing job rationing is a shortage of jobs arising naturally in an economic equilibrium from the combination of some wage rigidity and diminishing marginal returns to labor during recessions job rationing is acute driving the rise in unemployment whereas matching frictions contribute little to unemployment intuitively in recessions jobs are lacking the labor market is slack recruiting is easy and inexpensive so matching frictions do not matter much in a calibrated model cyclical fluctuations in the composition of unemployment are quantitatively large

the short run dynamics of the price adjustment to new information we examine how prices in interest rate and foreign exchange futures markets adjust to the new information contained in scheduled macroeconomic news releases in the very short run using 10 second returns and tick by tick data we find that prices adjust in a series of numerous small but rapid price changes that begin within 10 seconds of the news release and are basically completed within 40 seconds of the release there is some evidence that prices overreact in the first 40 seconds but that this is corrected in the second or third minute after the release while volatility tends to be higher than normal just before the news release there is no evidence of information leakage in our analysis we correct for the biases created by bid ask spreads and tick by tick data

is the 2007 u s sub prime financial crisis so different an international historical comparison the first major financial crisis of the twentyfirst century involves esoteric instruments unaware regulators and skittish investors it also follows a well trodden path laid down by centuries of financial folly is the special prob lem of sub prime mortgages really different our examination of the longer historical record which is part of a larger effort on cur rency and debt crises finds stunning qualitative and quantitative parallels across a number of standard financial crisis indicators to name a few the run up in us equity and housing prices that graciela l kaminsky and reinhart 1999 find to be the best leading indicators of crisis in countries experiencing large capital inflows closely tracks the average of the previous 18 post world war ii banking crises in industrial countries so too does the inverted v shape of real growth in the years prior to the crisis despite widespread concern about the effects on national debt of the tax cuts of the early 2000s the run up in us public debt is actually some what below the average of other crisis episodes in contrast the pattern of us current account deficits is markedly worse at this juncture the book is still open on how the current dislocations in the united states will play out the precedent found in the aftermath of other episodes suggests that the strains can be quite severe depending especially on the initial degree of trauma to the financial system and to some extent the policy response the average drop in real per capita output growth is over 2 percent and it typically takes two years to return to trend for the five most catastrophic cases which include episodes in finland japan

macroeconomic news announcements and stock market jump intensity dynamics abstract this paper examines the effect of macroeconomic releases on stock market volatility through a poisson gaussian garch process with time varying jump intensity which is allowed to respond to such information the day of the announcement per se is found to have little impact on jump intensities employment releases are an exception however when macroeconomic surprises are considered inflation shocks show persistent effects while monetary policy and employment shocks reveal only short lived effects also the jump intensity responds asymmetrically to macroeconomic shocks evidence on macroeconomic variables relevance in explaining jump dynamics and improving volatility forecasts on event days is provided

monetary policy under uncertainty in an estimated model with labor market frictions abstract we study the design of monetary policy in an estimated model with sticky prices search and matching frictions and staggered nominal wage bargaining we find that the estimated natural rate of unemployment is consistent with the nber description of the u s business cycle and that the inflation unemployment trade off facing monetary policymakers is quantitatively important we also show that parameter uncertainty has a limited effect on the performance or design of monetary policy while natural rate uncertainty has more sizeable effects nevertheless policy rules that respond to the output or unemployment gaps are more efficient than rules responding to output or unemployment growth rates also in the presence of uncertainty about the natural rates

learning about monetary policy rules when labor market search and matching frictions matter abstract this paper examines the implications of labor market search and matching frictions for determinacy and e stability of rational expectations equilibrium ree in a sticky price model with interest rate policy when labor adjustment takes place solely at the extensive margin forecast based policy that meets the taylor principle is likely to induce indeterminacy and e instability regardless of whether it is strictly or flexibly inflation targeting when labor adjustment takes place at both the extensive and intensive margins the strictly inflation forecast targeting policy remains likely to induce indeterminacy but it generates a unique e stable fundamental ree as long as the taylor principle is satisfied therefore the presence of search and matching frictions changes the determinacy properties of a strictly inflation forecast targeting policy and alters its e stability properties when only an extensive margin is present but not when labor adjustment takes place at both margins

optimal monetary policy in economies with dual labor markets abstract we present a dynamic stochastic general equilibrium dsge new keynesian model with indivisible labor and a dual labor market a walrasian one where wages are fully flexible and a unionized one characterized by real wage rigidity we show that the negative effect of a productivity shock on inflation and the positive effect of a cost push shock are crucially determined by the proportion of firms that belong to the unionized sector the larger this number the larger are these effects consequently the larger the union coverage the larger should be the optimal response of the nominal interest rate to exogenous productivity and cost push shocks the optimal inflation and output gap volatility increases as the number of the unionized firms in the economy increases

nominal vs real wage rigidities in new keynesian models with hiring costs a bayesian evaluation abstract the inclusion of labor market frictions in the new keynesian dsge model overcomes the main drawbacks of the baseline framework in this paper we show that this extended model by assuming real wage rigidities does not replicate the correct wage dynamics and the negative conditional correlation between technology shocks and employment observed in the data known as the productivity employment puzzle we show also that these empirical limitations can be overcome by replacing real wage rigidities with nominal wage rigidities without sacrificing other appealing features of the model we adopt a bayesian perspective to estimate the dynamic properties of the model with real wage rigidities and compare them with those of the model with nominal wage rigidities we show that the evidence favors this latter construction

hysteresis in a new keynesian model this paper examines hysteresis in which persistent unemployment takes on structural characteristics over time hysteresis is modeled as deterioration in labor market matching efficiency as the average duration of unemployment increases this is embedded in a simple new keynesian macro model a decline in labor market matching efficiency would be consistent with the observed rightward shift of the beveridge curve since the 2007 09 recession hysteresis is shown to lead to larger and more persistent responses of the unemployment rate and unemployment duration to productivity intertemporal preference and monetary shocks hysteresis also generates an increase in the natural rate of unemployment

a neoclassical model of the phillips curve relation this paper integrates the modern theory of unemployment with a limited participation model of money and asks whether such a framework can produce correlations like those associated with the phillips curve as well as realistic labor market dynamics the model incorporates both monetary and real shocks the response of the economy to monetary policy shocks is consistent with recent evidence about the impact of these shocks on the economy

factor complementarity and labour market dynamics 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 two of the endogenous mechanisms of the model factor complementarity and unemployment benefits play a key role for explaining the amplification in unemployment and vacancies second deep habits have a smaller but significant role as an endogenous mechanism third capital augmenting productivity investment specific and matching efficiency innovations explain large part of the variation in labour market variables

ramsey monetary policy with labor market frictions abstract traditional new keynesian models prescribe that optimal monetary policy should aim at price stability in the absence of a labor market frictions the monetary authority faces no unemployment inflation trade off the design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market optimal policy features deviations from price stability in response to both productivity and government expenditure shocks when the hosios 1990 on the efficiency of matching and related models of search and unemployment review of economic studies 57 2 279 298 condition is not met search externalities make the flexible price allocation unfeasible optimal deviations from price stability increase with workers bargaining power as firms incentives to post vacancies fall and unemployment fluctuates above the pareto efficient one

wall street s bailout bet market reactions to house price releases in the presence of bailout expectations abstract the rise and subsequent collapse of us house prices was one of the factors underlying the recent financial crisis one could expect that the crisis brought increased attention to the housing market and thus led to stronger market reactions to house price news we find that reactions indeed change but with a peculiar twist from september 2008 on good news from the housing market are associated with falling us stock prices and vice versa the likely explanation for which we provide cross sectional evidence is that falling house prices increased the market s trust in a government bailout thereby increasing market valuations of firms that were expected to benefit from government rescue measures

tax smoothing in frictional labor markets we re examine the optimality of tax smoothing from the point of view of frictional labor markets our central result is that whether or not this cornerstone optimal scal policy pre

labor market search the taylor principle and indeterminacy abstract in a sticky price model with labor market search and matching frictions forecast based interest rate policy almost always induces indeterminacy when it is strictly inflation targeting and satisfies the taylor principle indeterminacy is due to a vacancy channel of monetary policy that makes inflation expectations self fulfilling the effect of this channel strengthens as the sluggishness of the adjustment of employment relative to that of consumption increases when this relative sluggishness is high the taylor principle fails to ensure determinacy regardless of whether the policy is forecast based or outcome based whether it is strictly or flexibly inflation targeting or contains policy rate smoothing

ex ante free mobility ex post immobility and time consistency in a federal system abstract this paper examines regional population distribution when there is an interregional transfer policy without commitment we introduce explicitly the following time structure of actions individuals assumed to be identical make decisions on locational choices freely ex ante but are immobile ex post the fiscal policies of the local governments and the central government are implemented after individuals migration decisions the basic result is that locally stable no commitment equilibria are single community equilibria when there is a pure local public good we then illustrate the possibility for the interregional transfer policy to reduce the efficiency of population distribution

do labor market institutions matter for business cycles using panel data of 19 oecd countries observed over 40 years and data on specific labor market reform episodes we conclude that labor market institutions matter for business cycle fluctuations spearman partial rank correlations reveal that more flexible institutions are associated with lower business cycle volatility turning to the analysis of reform episodes wage bargaining reforms increase the correlation of the real wage with labor productivity and the volatility of unemployment employment protection reforms increase the volatility of employment and decrease the correlation of the real wage with labor productivity reforms reducing replacement rates make labor productivity more procyclical

labor market participation unemployment and monetary policy models of unemployment and monetary policy usually assume constant participation incorporating a participation decision into a standard new keynesian model with matching frictions we show that market tightness becomes endogenously more volatile because both the opportunity cost of home production and the reservation wage vary with participation the model can simultaneously explain the low volatility of participation the high volatility of unemployment and a procyclical workers outside option of working a policy of strict inflation targeting is close to optimal and increasing the response of the interest rate to inflation does not have a large impact on the volatility of unemployment because of the endogenous response of participation

unemployment and business cycles we develop and estimate a general equilibrium search and matching model that accounts for key business cycle properties of macroeconomic aggregates including labor market variables in sharp contrast to leading new keynesian models we do not impose wage inertia instead we derive wage inertia from our specification of how firms and workers negotiate wages our model outperforms a variant of the standard new keynesian calvo sticky wage model according to our estimated model there is a critical interaction between the degree of price stickiness monetary policy and the duration of an increase in unemployment benefits

optimal monetary policy with labor market frictions the role of the wage channel this paper introduces right to manage bargaining into a labor search model with sticky prices instead of standard efficient bargaining and examines the ramsey optimal monetary policy without real wage rigidity even when the steady state is inefficient price stability is nearly optimal in response to technology or government shocks right to manage bargaining creates the wage channel to inflation because there is a direct relationship between real wages and real marginal cost in the presence of the wage channel price markups consist of only real marginal cost and real wages and hours per worker are determined such as in the walrasian labor market

the phillips and beveridge curves revisited abstract this paper extends the labor market search model to account for monopolist intermediate good firms who face price adjustment costs we show quantitatively that embedding monetary shocks in this framework allows to mimic the phillips and beveridge curves

optimal monetary policy in a new keynesian model with job search abstract this paper studies the implications for optimal monetary policy of introducing job search into the new keynesian framework using the linear quadratic approach described by benigno and woodford 2008 we derive a utility based loss function that indicates that the goals of policymakers can be represented by the stabilization of inflation output employment and labor market tightness we characterize the policy that is optimal from a timeless perspective complete inflation stabilization is optimal if the distortions caused by monopolistic competition and search externalities are eliminated in cases where search externalities prevail either in or out of the steady state complete inflation stabilization is no longer optimal and the optimal responses of inflation to aggregate shocks may depend on labor market fundamentals

search and matching frictions and optimal monetary policy abstract a recent literature has merged the new keynesian and the search and matching frameworks which has allowed the former to analyze the joint dynamics of unemployment and inflation this paper analyzes optimal monetary policy in this kind of hybrid framework i show that zero inflation is optimal when all wages are nash bargained in every period and the economy s steady state is efficient in the more realistic case in which nominal wage bargaining is staggered a case against price stability arises in response to real shocks the central bank should use price inflation so as to avoid excessive unemployment volatility and excessive dispersion in hiring rates for a plausible calibration the welfare loss under the zero inflation policy is about three times as large as under the optimal policy

optimal monetary policy rules with labor market frictions abstract this paper studies optimal monetary policy rules in a framework with sticky prices matching frictions and real wage rigidities optimal policy is given by a constrained ramsey plan in which the monetary authority maximizes the agents welfare subject to the competitive economy relations and the assumed monetary policy rule i find that the optimal rule should respond to unemployment alongside with inflation this is so since models with matching frictions unlike standard new keynesian models feature a congestion externality that makes unemployment inefficiently high a strong response to inflation remains optimal while a response to output is always welfare detrimental

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

labor market frictions and optimal steady state inflation in central theories of monetary non neutrality the ramsey optimal steady state inflation rate varies between the negative of the real interest rate and zero this paper explores how the interaction of nominal wage and search and matching frictions affect the policy prescription we show that adding the combination of such frictions to the canonical monetary model can generate an optimal inflation rate that is significantly positive specifically for a standard u s calibration we find a ramsey optimal inflation rate of 1 16 percent per year

optimal monetary policy with endogenous entry and product variety deviations from long run price stability are optimal in the presence of endogenous entry and product variety in a sticky price model in which price stability would be optimal otherwise long run inflation deflation is optimal when the benefit of variety to consumers falls short of exceeds the market incentive for creating that variety the desired markup price indexation exacerbates this mechanism plausible preference specifications and parameter values justify positive long run inflation rates however short run price stability around this non zero trend is close to optimal even in the presence of endogenously time varying desired markups that distort the intertemporal allocation of resources

intraday jumps and us macroeconomic news announcements this paper applies recent non parametric intraday jump detection procedures to investigate the presence and importance of intraday jumps in us futures markets more importantly the paper investigates the extent to which statistically significant intraday jumps are associated with us macroeconomic news announcements jumps are prevalent large and contribute heavily to total daily price variation approximately one third of jumps correspond to us macroeconomic news announcements with pure announcement effects causing large increases in the absolute sizes of jumps and the informational surprise of the announcement explaining large proportions of the jumps the statistical and economic significance of news related jumps is confirmed by results that show higher volatility persistence predictability of lower frequency returns larger effects on microstructure variables jump clustering and co jumps from these jumps versus non news related jumps although there are some interesting variations across asset classes

the creation and resolution of market uncertainty the impact of information releases on implied volatility we model and examine the impact of information releases on market uncertainty as mea sured by the implied standard deviation isd from option markets distinguishing between scheduled and unscheduled announcements we hypothesize that since the timing although not the content of scheduled announcements is known a priori the pre release isd will impound the anticipated impact of important releases on price volatility and that the isd will normally decline post release as this uncertainty is resolved conversely we hypothesize that the unexpected high volatility caused by major unscheduled releases will cause market participants to adjust upward their estimates of likely volatility over the remaining life of the option resulting in an increase in the isd our evidence supports both hypotheses the isds that we consider are from the t bond eurodollar and deutschemark options markets we examine scheduled macroeconomic news releases such as the employment report and the ppi we also find that the observed tendency for the isd to fall on fridays and rise on mondays is due to the weekday pattern of scheduled news releases

asymmetric labor market institutions in the emu and the volatility of inflation and unemployment differentials how does the asymmetry of labor market institutions affect the adjustment of a currency union to shocks to answer this question this paper sets up a dynamic currency union model with monopolistic competition and sticky prices hiring frictions and real wage rigidities in our analysis we focus on the differentials in inflation and unemployment between countries as they directly reflect how the currency union responds to shocks we highlight the following three results first we show that it is important to distinguish between different labor market rigidities as they have opposite effects on inflation and unemployment differentials second we find that asymmetries in labor market structures tend to increase the volatility of both inflation and unemployment differentials finally we show that it is important to take into account the interaction between different types of labor market rigidities overall our results suggest that asymmetries in labor market structures worsen the adjustment of a currency union to shocks

monetary policy and labor market frictions a tax interpretation replicating the flexible price allocation in models with nominal rigidities and labor market frictions that lead to an inefficient matching of unemployed workers with job vacancies even if feasible is generally not desirable we characterize the tax instruments that implement the first best allocation and examine the trade offs faced by monetary policy if these tax instruments are unavailable our tax interpretation helps explain why the welfare cost of inefficient labor market search can be large while the incentive to deviate from price stability is small gains from deviating from price

inflation dynamics marginal cost and the output gap evidence from three countries recent studies have argued that the new keynesian phillips curve calvo pricing model is empirically valid provided that real marginal cost rather than detrended output is used as the variable driving inflation one interpretation of this result is that real marginal cost is not closely related to the output gap and so models for monetary policy need to include labormarket rigidities an alternative interpretation is that marginal cost and the output gap are closely related but that the latter needs to be measured in a manner consistent with dynamic general equilibrium models to date there has been little econometric investigation of this alternative interpretation this paper provides estimates of the new keynesian phillips curve for the u s the u k and australia using theory consistent estimates of the output gap using this theory to measure the output gap leads to a considerable improvement in the empirical performance of output gapbased phillips curves

attachment to home and efficient purchases of population in a fiscal externality economy abstract this paper examines the efficiency properties of an economy characterized by strategically competing regions and individuals with varying degrees of attachment to home in an otherwise standard fiscal externality setting regional authorities may make interregional transfers in purchasing preferred populations however there is a range of distributions of resources over which neither region makes transfers nevertheless all equilibrium allocations resulting from the nash behavior of regional authorities including those that involve no transfers are efficient therefore in contrast to the standard conclusions of the fiscal externality literature there is no efficiency role for a central authority

tax competition in a fiscal union with decentralized leadership this paper examines capital tax competition in the presence of an interstate transfer policy without federal commitment lack of commitment implies that local tax policy is chosen prior to federal transfers the paper s main result is that ex post federal policy neutralizes horizontal fiscal externalities insulating tax policy from capital mobility federal policy however introduces a new source of inefficiency unrelated to tax competition specifically ex post transfer payments prove to be equivalent to an interstate revenue sharing system which may render federal intervention in the presence of fiscal externalities welfare deteriorating relative to tax competition

a fiscal stimulus and jobless recovery we analyze the effects of a government spending expansion in a dynamic stochastic general equilibrium model with mortensen pissarides labor market frictions deep habits in private and public consumption investment adjustment costs a constant elasticity of substitution ces production function and adjustments in employment at both intensive and extensive margins the combination of deep habits and ces technology is crucial the presence of deep habits magnifies the responses of macroeconomic variables to a fiscal stimulus while an elasticity of substitution between capital and labor in the range of available estimates allows the model to produce a scenario compatible with the observed jobless recovery

inter jurisdictional competition for firms regions inhabited with an immobile population of disabled and able individuals compete to attract mobile firms that provide jobs the redistributive goal of regional governments is to support the disabled who cannot work able individuals may work be involuntary unemployed because of frictions in the labor market or choose to be voluntary unemployed labor force participation decisions depend on regional redistributive policies both the size of workforce and tax on firms affect profits and therefore firms location decisions allowing regions to engage in tax competition may be efficient if regions cannot tax firms they compete by implementing inefficient redistributive policies

optimal monetary policy and downward nominal wage rigidity in frictional labor markets empirical evidence suggests that nominal wages in the u s are downwardly rigid this paper studies the optimal long run inflation rate in a labor search and matching framework under the presence of downward nominal wage rigidity dnwr in this environment optimal monetary policy targets a positive inflation rate the annual long run inflation rate for the u s is around 2 percent positive inflation greases the wheels of the labor market by facilitating real wage adjustments and hence it eases job creation and prevents excessive increase in unemployment following recessionary shocks these findings are related to standard ramsey theory of wedge smoothing by following a positive inflation policy under sticky prices the monetary authority manages to reduce the volatility and the size of the intertemporal distortion significantly the intertemporal wedge is completely smoothed when prices are fully flexible since the optimal long run inflation rate predicted by this study is considerably higher than in otherwise neoclassical labor markets the nature of the labor market in which dnwr is studied can be relevant for policy recommendations

search frictions real rigidities and inflation dynamics the standard new keynesian model suffers from the so called macro micro pricing conflict in order to match the dynamics of inflation implied by macroeconomic data the model needs to assume an average duration of price contracts which is much longer than what is observed in micro data here i show how departing from the standard model s assumption of a perfectly competitive labor market can help resolve the pricing conflict i do so by assuming search frictions in the labor market in this framework labor becomes firm specific and marginal cost curves become upward sloping this mechanism reduces the slope of the new keynesian phillips curve given a frequency of price adjustment conversely given an estimate of this slope my model implies shorter price durations than the standard model for a plausible calibration and for different slope values my model consistently delivers price durations that are roughly half of those implied by the standard model

interregional interactions and population mobility the institutional level at which policies should be determined is an important issue that has been extensively treated in the economics literature in particular the literature has discussed to what extent decentralization of policy decisions give an inefficient outcome with a homogeneous population and perfect population mobility as it conventionally is modeled the following result is derived for a very general class of economies with interregional interactions a socially efficient outcome is a nash equilibrium of the game of decentralized and uncoordinated policy setting however if decisions about migration take a longer time to make than decisions of policy changes the general result above no longer holds with this decision sequence decentralization may give an inefficient outcome also in situations where the decentralized outcome is efficient in the absence of population mobility

downward nominal wage flexibility real or measurement error this paper presents a new method to correct for measurement error in wage data and applies this method to address an old question how much downward wage flexibility is there in the united states we apply standard methods developed by bai and perron to identify structural breaks in time series data applying these methods to wage histories allows us to identify when each person experiences a change in nominal wages the length of the period of constant nominal wages is left unrestricted and is allowed to differ across individuals as are the size and direction of the nominal wage change we apply these methods to data from the survey of income and program participation the evidence we provide indicates that the probability of a cut in nominal wages is substantially overstated in data that are not corrected for measurement error

labor and the market value of the firm what role does labor play in a firm s market value we explore this question using a production based asset pricing model with frictions in the adjustment of both capital and labor we posit that hiring of labor is akin to investment in capital and that the two interact with the interaction being a crucial determinant of the time series behavior of market value we use aggregate u s corporate sector data to estimate firms optimal hiring and investment decisions and the consequences for firms value the model generates a good fit of the data we decompose the estimated market value thereby quantifying the link between firms value and gross hiring flows employment gross investment flows and physical capital we find that a conventional specification quadratic adjustment costs for capital and no hiring costs performs poorly hiring and investment flows unlike employment and capital stocks are volatile and both are essential to account for market value volatility a key result is that firms value embodies the value of hiring and investment over and above the capital stock