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Assessing the Empirical Relevance of Labour Frictions to Business Cycle Fluctuations

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  • João Madeira

Abstract

This paper describes a dynamic stochastic general equilibrium model augmented with labour frictions, namely: indivisible labour, 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 labour frictions introduced are relevant for model dynamics and economic policy: the effect of total factor productivity 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. Labour frictions also provide a better match to impulse response functions from vector autoregressive models.

Suggested Citation

  • João Madeira, 2018. "Assessing the Empirical Relevance of Labour Frictions to Business Cycle Fluctuations," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 80(3), pages 554-574, June.
    • Handle: RePEc:bla:obuest:v:80:y:2018:i:3:p:554-574
    DOI: 10.1111/obes.12215
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    Cited by:

    1. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2020. "Default, Bailouts and the Vertical Structure of Financial Intermediaries," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 154-180, October.
    2. Carlos Madeira & João Madeira & Paulo Santos Monteiro, 2023. "The origins of monetary policy disagreement: the role of supply and demand shocks," BIS Working Papers 1118, Bank for International Settlements.
    3. Anelí Bongers, 2023. "Learning by doing, organizational forgetting, and the business cycle," Bulletin of Economic Research, Wiley Blackwell, vol. 75(1), pages 141-150, January.

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