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Nominal Wage Contracts, Labor Adjustment Costs and the Business Cycle

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  • Zuzana Janko

    (University of Calgary)

Abstract

Previous work of monetary dynamic stochastic general equilibrium models with nominal rigidity a la Taylor, particularly the Cho-Cooley model, was abandoned in favor of the New-Keynesian analysis due to the model's failure to deliver business cycle statistics that match the U.S. economy along some key dimensions. In this paper, we take a step in revitalizing the Cho-Cooley avenue of research. We add empirically plausible labor adjustment costs (LAC) into a model with nominal wage rigidity and find that with LAC our model is able to overcome some of the shortcomings otherwise present in the Cho-Cooley framework, specifically high standard deviations of real variables and a countercyclical productivity. (Copyright: Elsevier)

Suggested Citation

  • Zuzana Janko, 2008. "Nominal Wage Contracts, Labor Adjustment Costs and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 434-448, April.
    • Handle: RePEc:red:issued:06-23
    DOI: 10.1016/j.red.2007.08.004
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    1. Moon, Weh-Sol, 2018. "The Business Cycle With Nominal Contracts And Search Frictions," Macroeconomic Dynamics, Cambridge University Press, vol. 22(2), pages 307-330, March.
    2. Guglielmo Maria Caporale & Alessandro Girardi & Marco Ventura, 2012. "The euro changeover and price adjustments in Italy," Applied Economics Letters, Taylor & Francis Journals, vol. 19(4), pages 379-382, March.
    3. Mumtaz, Haroon & Zanetti, Francesco, 2015. "Factor adjustment costs: A structural investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 341-355.
    4. Lechthaler, Wolfgang & Snower, Dennis J., 2013. "Quadratic Labor Adjustment Costs, Business Cycle Dynamics, And Optimal Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 17(2), pages 464-475, March.
    5. Muhanji, Stella & Malikane, Christopher & Ojah, Kalu, 2013. "Price and liquidity puzzles of a monetary shock: Evidence from indebted African economies," Economic Modelling, Elsevier, vol. 33(C), pages 620-630.
    6. Moon, Weh-Sol, 2011. "Business cycle with nominal contracts and search frictions," MPRA Paper 31716, University Library of Munich, Germany.
    7. Ivo Krznar, 2008. "International Business Cycles with Frictions in Goods and Factors Markets," Working Papers 18, The Croatian National Bank, Croatia.
    8. Ambler, Steve & Guay, Alain & Phaneuf, Louis, 2012. "Endogenous business cycle propagation and the persistence problem: The role of labor-market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 47-62.
    9. Coşkun, Sevgi, 2022. "Informal employment and business cycles in emerging market economies," Journal of Macroeconomics, Elsevier, vol. 74(C).
    10. Muhanji, Stella & Ojah, Kalu, 2011. "External shocks and persistence of external debt in open vulnerable economies: The case of Africa," Economic Modelling, Elsevier, vol. 28(4), pages 1615-1628, July.

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    More about this item

    Keywords

    Taylor nominal wage contracts; Labor adjustment costs; Business cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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