From the Great Inflation to the Great Moderation: Assessing the Roles of Firm-Specific Labor, Sticky Prices and Labor Supply Shocks

CIRPEE Working Paper No. 08-12

42 Pages Posted: 17 Jul 2008

See all articles by Maher Khaznaji

Maher Khaznaji

University of Quebec at Montreal; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Louis Phaneuf

Universite du Quebec a Montreal; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Date Written: July 17, 2008

Abstract

We develop and estimate a dynamic stochastic general equilibrium model that features sticky prices, a variable elasticity of demand facing firms and firm-specific labor. While reconciling to a good extent the micro and macro evidence on the behavior of prices, the model offers an accurate account of the dramatic increase in macroeconomic stability from the Great Inflation (1948:I-1979:II) to the Great Moderation (1984:I-2006:II). Reminiscent of the evidence in Shapiro and Watson (1988), the paper shows that labor-supply shocks are the key source of the reduction in the volatility of output growth, followed by investment-specific shocks. However, changes in the behavior of the private sector, a less accommodative monetary policy and smaller shocks explain almost evenly the large decline of the variability in inflation.

Keywords: Great Moderation, firm-specific labor, variable demand elasticity, nominal price rigidity

JEL Classification: E31, E32

Suggested Citation

Khaznaji, Maher and Phaneuf, Louis, From the Great Inflation to the Great Moderation: Assessing the Roles of Firm-Specific Labor, Sticky Prices and Labor Supply Shocks (July 17, 2008). CIRPEE Working Paper No. 08-12, Available at SSRN: https://ssrn.com/abstract=1162159 or http://dx.doi.org/10.2139/ssrn.1162159

Maher Khaznaji

University of Quebec at Montreal ( email )

PB 8888 Station DownTown
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Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

Louis Phaneuf (Contact Author)

Universite du Quebec a Montreal ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada
514-987-6181 (Phone)

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

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