Interactions between Heterogeneity in Nominal Rigidities and Search Frictions in General Equilibrium Models
Date: 16 February 2018
University of Exeter
PhD in Economics
This dissertation consists of three chapters that aim to build a framework which can be used to study interactions between the labour market and macroeconomic dynamics. To achieve this, we reformulate a standard New Keynesian dynamic stochastic general equilibrium (DSGE) model to include search and matching frictions in the labour ...
This dissertation consists of three chapters that aim to build a framework which can be used to study interactions between the labour market and macroeconomic dynamics. To achieve this, we reformulate a standard New Keynesian dynamic stochastic general equilibrium (DSGE) model to include search and matching frictions in the labour market and heterogeneity in price and wage stickiness. The first chapter, coauthored with Professor Engin Kara, builds a real business cycle model with labour search frictions and heterogeneity in wage stickiness. Shimer’s (2005) critique on labour search models, that it cannot explain observed unemployment movements, reignited a long-standing debate on unemployment fluctuations and wage determination. Gertler and Trigari (2009) introduce wage stickiness to the model to match unemployment volatility, while Pissarides (2009) finds this modification not satisfactory, citing evidence on high wage cyclicality. We find heterogeneity in wage stickiness in microdata on wages. Our model, which reflects this heterogeneity, matches the data better than its one sector alternatives. The second chapter, coauthored with Professor Engin Kara, studies output dynamics in New Keynesian models with the standard labour market and heterogeneity in price stickiness. We analytically and numerically show that these models can reproduce a hump-shaped output response to persistent monetary shocks, which is a key feature of monetary transmission mechanism. The version of models without heterogeneity cannot generate a hump. Flexible prices in models with heterogeneity play a crucial role, by generating inertia to price-setting and output. The third chapter studies how the labour search frictions affect output dynamics in New Keynesian models, when combined with heterogeneity in nominal rigidities. Long-term employment relationship, that arises under search and matching framework, makes marginal costs history dependent. We show that this history dependence generates inertia in the model. Heterogeneity in nominal rigidities significantly reinforces this inertia, resulting in a hump-shaped output response to persistent monetary shocks. The model without the search frictions cannot replicate a hump even when monetary shocks are persistent, when wages are sticky.
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