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The Hiring Frictions and Price Frictions Nexus in Business Cycle Models

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  • Yashiv, Eran
  • Faccini, Renato

Abstract

We study the interactions between hiring frictions and price frictions in business cycle models. We find that these interactions matter in a significant way for business cycle fluctuations and for labor market outcomes. Using a simple DSGE business-cycle model with Diamond-Mortensen-Pisssarides (DMP) elements, we derive two main results. First, introducing hiring frictions into a New Keynesian model offsets the effects of price frictions. As a result, some business cycle outcomes are actually close to the frictionless New Classical-type outcomes; namely, with moderate hiring frictions the response of employment to technology shocks is positive, and the effects of monetary policy shocks are small, if not neutral. Moreover, it generates endogenous wage rigidity. Second, introducing price frictions into a DMP setting generates amplification of employment and unemployment responses to technology shocks, as well as hump-shaped dynamics. Both results arise through the confluence of frictions. We offer an explanation of the mechanisms underlying them.

Suggested Citation

  • Yashiv, Eran & Faccini, Renato, 2016. "The Hiring Frictions and Price Frictions Nexus in Business Cycle Models," CEPR Discussion Papers 11639, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11639
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    Cited by:

    1. Yashiv, Eran, 2016. "Aggregate Hiring and the Value of Jobs Along the Business Cycle," CEPR Discussion Papers 11076, C.E.P.R. Discussion Papers.
    2. Euiyoung Jung, 2021. "On the design of labor market programs as stabilization policies," PSE Working Papers halshs-03243698, HAL.
    3. Yashiv, Eran, 2016. "Aggregate hiring and the value of jobs along the business cycle," LSE Research Online Documents on Economics 86175, London School of Economics and Political Science, LSE Library.
    4. Euiyoung Jung, 2021. "On the design of labor market programs as stabilization policies," Working Papers halshs-03243698, HAL.

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    More about this item

    Keywords

    Hiring frictions; Price frictions; New classical model; Business cycles; Mortensen and pissarides (dmp) model; Technology shocks;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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