Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions

34 Pages Posted: 21 Jun 2011 Last revised: 8 Mar 2014

See all articles by Nicolas Petrosky-Nadeau

Nicolas Petrosky-Nadeau

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Etienne Wasmer

New York University (NYU) - New York University, Abu Dhabi; Centre for Economic Policy Research (CEPR)

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Date Written: February 12, 2014

Abstract

This paper shows that goods-market frictions drastically change the dynamics of the labor market, bridging the gap with the data both in terms of persistence and volatility. In a DSGE model with three imperfect markets – goods, labor and credit – we find that credit- and goods-market imperfections are substitutable in raising volatility. Goods-market frictions are however unique in generating persistence. The two key mechanisms generating autocorrelation in growth rates and the hump-shaped pattern in the response to productivity shocks are related to the goods market: i) countercyclical dynamics of goods market tightness and prices, which alter future profit flows and raise persistence and ii) procyclical search effort in the goods market, by either consumers, firms or both, raises both amplification and persistence. Expanding our knowledge of goods market frictions is thus needed for a full account of labor market dynamics.

Suggested Citation

Petrosky-Nadeau, Nicolas and Wasmer, Etienne, Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions (February 12, 2014). Available at SSRN: https://ssrn.com/abstract=1865876 or http://dx.doi.org/10.2139/ssrn.1865876

Nicolas Petrosky-Nadeau (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Etienne Wasmer

New York University (NYU) - New York University, Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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