Top PDF A New Keynesian Model with Overtime Labor

A New Keynesian Model with Overtime Labor

A New Keynesian Model with Overtime Labor

The …rst order condition for the …rm’s price setting behavior is similar to the standard Calvo model (price is a function of all future expected marginal costs). However, since a …rm’s choice of full time employment is among the determinants of its marginal product of labor, I cannot solve the price setting problem without considering the …rm’s optimal employment behavior. The reason for this is that N1 is not purchased on a spot market. Workers are contracted to one …rm only and the existence of convex adjustment costs prevents a more rapid adjustment of a …rm’s number of workers. A …rm’s marginal cost therefore depends on its present full time employment numbers and these depend on the …rm’s decisions in previous periods, including its price-setting decisions. The …rm’s choices here are more complex than in standard sticky price models (which typically assume rental markets for production factors) but the problem is very similar to the case of …rm-speci…c capital solved by Woodford (2005).
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Unemployment in an estimated new Keynesian model

Unemployment in an estimated new Keynesian model

ment ‡uctuations in our estimated model? Table 2 presents the variance decomposition of the forecast errors of the eight observable variables at the 10 quarter and 10 year horizons. The …rst entry in each cell gives the percent contribution of each shock to ‡uctuations in each variable in the model with unemployment as an observable, whereas the second entry given the corre- sponding share in the model without unemployment. CKM argue that the contribution of the wage markup shocks to output and employment ‡uctua- tions (about 50 and 80 percent at the 10 year horizon in the model without unemployment) was too high to be plausible. Distinguishing labour supply shocks from wage markup shocks by introducing unemployment helps ad- dress this issue. From Table 2 it is clear that the contribution of the wage markup shocks to output (employment) ‡uctuations at the 10 year horizon drops substantially, from 45 (77) percent to 17 (39) percent, in the model with unemployment. Furthermore, in the latter labor supply shocks (which are now separately identi…ed) account for about 17, 40 and 89 percent of ‡uctuations in output, employment and the labor force respectively (instead they are ignored in the model without unemployment, as in SW (2007)).
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Unemployment in an Estimated New Keynesian Model

Unemployment in an Estimated New Keynesian Model

The proposed reformulation allows us to overcome an identification prob- lem pointed out by Chari, Kehoe and McGrattan (2008; henceforth, CKM) and interpreted by these authors as an illustration of the immaturity of New Keynesian models for policy analysis. Their observation is motivated by the SW finding that wage markup shocks account for almost 50 percent of the variations in real GDP at horizons of more than 10 years. However, with- out an explicit measure of unemployment (or, alternatively, labor supply), these wage markup shocks cannot be distinguished from preference shocks that shift the marginal disutility of labour. The policy implications of these two sources of fluctuations are, however, very different. Variations in wage markup shocks are inefficient and a welfare-maximising government should be interested in stabilising output fluctuations resulting from those shocks (at least partly). In contrast, output and employment fluctuations driven by preference shocks shifting the labor supply schedule, should in princi- ple be accommodated. Put it differently, the relative importance of those two shocks will influence the extent to which fluctuations in output during a given historical episode should or should not be interpreted as reflecting movements in the welfare relevant output gap (i.e. the distance between the actual and efficient levels of output). By including unemployment as an ob- servable variable, this identification problem can be overcome, and "correct" measures of the output gap can be constructed, as we show in Section 4.
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Real wage rigidities and the new Keynesian model

Real wage rigidities and the new Keynesian model

The property just described can in turn be traced to the absence of non trivial real imperfections in the standard NK model. This leads us to introduce one such real imperfection, namely real wage rigidities. The existence of real wage rigidities has been pointed to by many authors as a feature needed to account for a number of labor market facts (see, for example, Hall [2005]). We show that, once the NK model is extended in this way, the divine coincidence disappears. The reason is that the gap between natural and efficient output is no longer constant, and is now affected by shocks. Stabilizing inflation is still equivalent to stabilizing the output gap, but no longer equivalent to stabilizing the welfare- relevant output gap. Thus, it is no longer desirable from a welfare point of view. Stabilization of inflation and stabilization of the welfare-relevant output gap now present the monetary authority with a trade-off. In the face of an adverse supply shocks, in particular, the monetary authority must decide whether to accommodate a higher level of inflation or, instead, keep inflation constant but allow for a larger decline in the welfare-relevant output gap.
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A New Keynesian Model with Endogenous Frictions

A New Keynesian Model with Endogenous Frictions

It is important to mention that the analysis of both aspects – uncertainty and rigidities – within the New Keynesian model framework has been an important focus of recent research. In particular the inclusion of costs of re-allocation is also considered by other authors, e.g. Smets and Wouters (2003) and (2007) and Christiano et al. (2005) develop a model where ad- justment to the utilization of the capital stock of households incurs costs of re-allocation and where the empirically observed persistence of consumption is introduced into the model framework by external habit formation. Our description of costs of re-allocation is different in two aspects: First of all, the persistence of consumption is not introduced by external habit formation but is explained by the costs economic subjects face when they have to alter long-term consumption plans and hence provides an alternative explanation for households’ consumption persistence. Secondly, we include costs of re- allocation on the supply side as well, where they will appear in the form of overhead costs due to labor surplus when demand is below expectations or additional short-term hiring costs whenever demand for goods exceeds pre- vious expectations. Hiring costs have been integrated into a New Keynesian model framework before, in particular by Blanchard and Gali 2008, who as- sumed that period t labor demand N t is given by a fixed factor of previous
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Monetary policy analysis in a new keynesian model

Monetary policy analysis in a new keynesian model

In short, the economy initially suffers from an expansive cycle due to the technological shock, where prices have fallen due to the reduction in labor costs, and which also has even greater possibilities due to the greater effect of this technological improvement on potential output. The Central Bank’s target variables, inflation and the output gap, are initially reduced. How does the Central Bank respond immediately? It lowers the nominal rate, thus allowing the economy to grow even more, encouraging consumption and activity which in theory will lead to an increase in prices. This initial drop in the nominal rate corresponds, on the contrary, to an increase in the real interest rate. This is because initial expectations of a price decline dominate over this interest rate, due to its smoothing policy on interest rate adjustments. The Central Bank’s strategy will be to maintain increasingly low interest rates until the problem of falling prices and the output gap has been solved. Therefore, during 3- 4 quarters after the shock, we can see how the Central Bank cuts the nominal interest rate. What effect does this lowering of the nominal interest rate have on the economy?
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Real Wage Rigidities and the New Keynesian Model

Real Wage Rigidities and the New Keynesian Model

The property just described can in turn be traced to the absence of non trivial real imperfections in the standard NK model. This leads us to introduce one such real imperfection, namely real wage rigidities. The existence of real wage rigidities has been pointed to by many authors as a feature needed to account for a number of labor market facts (see, for example, Hall [2005]). We show that, once the NK model is extended in this way, the divine coincidence disappears. The reason is that the gap between natural and efficient output is no longer constant, and is now affected by shocks. Stabilizing inflation is still equivalent to stabilizing the output gap, but no longer equivalent to stabilizing the welfare- relevant output gap. Thus, it is no longer desirable from a welfare point of view. Stabilization of inflation and stabilization of the welfare-relevant output gap now present the monetary authority with a trade-off. In the face of an adverse supply shocks, in particular, the monetary authority must decide whether to accommodate a higher level of inflation or, instead, keep inflation constant but allow for a larger decline in the welfare-relevant output gap.
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Macroeconomic fluctuations in a New Keynesian disequilibrium model

Macroeconomic fluctuations in a New Keynesian disequilibrium model

This study extends the current New Keynesian modeling framework by changing one crucial aspect: it replaces the general equilibrium assumption by the arguably more realistic assumption of macroeconomic disequilibrium. As a result, more complex and less smooth macroeconomic adjustment dynamics result, as it is not necessary to assume that goods and labor markets continuously clear. The disequilibrium dynamics in the form of regime-dependent output-, employment-, price- and wage fluctuations complicate the decision making problems faced by the fiscal and monetary policy makers substantially. In particular, the possibility of (multiple) regime switches implies the need for deeper analysis and careful monitoring of the disequilibrium mechanisms and dynamics when designing and implementing monetary and fiscal policies. Keywords: Disequilibrium analysis, New Keynesian model, Rationing, Macroeconomic policy
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Fair Wages in a New Keynesian Model of the Business Cycle

Fair Wages in a New Keynesian Model of the Business Cycle

and G¨ achter, 2001, Howitt, 2002, or Bewley, 2002 for surveys). The fair wage idea was first intro- duced in a dynamic stochastic general equilibrium (DSGE) context by Danthine and Donaldson (1990). Within the confines of a RBC model, these authors find that if the reference compensation level includes contemporaneous variables only, fair wage labor market frictions generate structural unemployment but do not translate into equilibrium wage sluggishness and therefore cannot resolve the wage-employment puzzle. 5 Kiley (1997) is similarly negative in his assessment about the poten- tial of the effort efficiency wage story. In his stylized framework, acyclical real wages (in line with the data) require countercyclical effort, thus inducing a highly volatile and procyclical real marginal cost and preventing any strengthening of the internal propagation mechanism of the model. More recently however, Collard and de la Croix (2000) have shown, in a RBC model context, that if the reference compensation level of the effort function not only consists of contemporaneous variables but also includes comparisons between current and past compensation levels, acyclical real wages can coexist with cyclical or even procyclical effort. This intertemporal view of effort determination is supported by survey results of Bewley (1998) who argues that ”...[Akerlof’s model] is correct in emphasizing morale, and errs only if importance is attached to wage levels rather than to changes in them.”
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Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model

Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model

fluctuations. Other relevant sources of frictions and rigidities, such as labor market frictions in the form of wage rigidities and labor adjustment cost, which are known to affect considerably the business cycle and therefore the policy prescriptions, should be introduced into the model. Along this line of research, many other features could be included in the present model, such as distortionary taxation on labor income, consumption and capital, opening up to a non-trivial interaction between environmental regulations and fiscal stabilization policies. Furthermore, the issue of the interaction between environmental and monetary policy has been touched upon in this paper, but deserves much further research. Clearly, the changes in the nominal inter- est rates induced by a central bank in response to shocks are able to set in motion a number of mechanisms and actions by economic agents and ultimately influence the developments of output and emissions. Finally, the analysis conducted in this paper allows us only to explore the implications of environmental regulations and provide policy prescriptions for an economy that have reached its steady-state level. However, since environmental policy regarding climate change focuses on long-term goals, more work should be devoted to the study of the transition of the economy toward a low-carbon new steady state, starting from a no policy equilibrium, accounting for uncertainty and comparing the performance of the different policy options along the adjustment path.
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Disaster risk and preference shifts in a New Keynesian model

Disaster risk and preference shifts in a New Keynesian model

In this case, we just changed the value of the EIS to 0.5 compared to the previous case. As one can see on Figure 2, this is enough to make the sign of most variables completely opposite. Contrary to Case 1, a low EIS implies that agents’ propensity to save increases with the disaster risk. This is cap- tured here by an increase in the discount factor, that can be interpreted as a higher degree of patience. This makes the agents save more and invest more. The lower consumption on impact does not have much effect on the total output response. The price of goods drops on impact but rises immediately after (since there is no price rigidity in this case). Hence firms expect the de- flation to be short and want to increase their demand for production factors, as well as the utilization rate of capital. Therefore, the rental rate of capital goes up, making the households willing to invest more. Overall, the rise in investment is higher than the drop in consumption, such that the economy enters a boom. As consumption decreases, the marginal utility increases, so the labor supply increases and the wage goes down despite the boom.
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Optimal Opportunistic Monetary Policy in a New-Keynesian Model

Optimal Opportunistic Monetary Policy in a New-Keynesian Model

A BSTRACT . The present paper compares the performance in terms of second order ac- curate welfare of opportunistic non-linear Taylor rules and with respect to traditional linear Taylor rules. The macroeconomic model representing the benchmark for the analysis in- cludes capital accumulation (with quadratic costs of adjustment), price rigidities (quadratic approach), along the standard New-Keynesian approach. The model is solved up to second order approximation and welfare is evaluated according to several criteria (conditional to the non-stochastic steady state, unconditional, and according to a linear ad hoc function). The results show that: (i) the opportunistic rule is a Pareto improvement with respect to other monetary policy rules traditionally considered in the literature; (ii) the computation of wel- fare costs reveals that the burden of adjustment is almost entirely on labor supply fluctuations; (iii) increasing the degree of price rigidities and the degree of competition in the final goods markets, makes the opportunistic rule even more preferable with respect to the alternatives. Business Cycle statistics for the model with opportunistic rule show a large volatility in labor supply, with a limited volatility for the nominal interest rate.
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Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model

Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model

The economy is described by a standard New Keynesian model with nominal prices rigidities ` a la Calvo (1983), extended to account for pollutant emissions and environmental policy. Time is discrete and indexed by t = 0, 1, 2, ... There are five types of economic agents: (i) a continuum of monopolistically competitive polluting firms, each of which producing a single horizontally dif- ferentiated intermediate goods by using labor and physical capital as factor inputs; (ii) perfectly competitive firms combining domestically produced intermediate goods to produce a final con- sumption good; (iii) households who consume, offer labor services, and rent out capital to firms; (iv) a central bank making decisions on monetary policy; (v) a government deciding on fiscal and environmental policy.
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Fiscal policy and the labor market in a New Keynesian framework

Fiscal policy and the labor market in a New Keynesian framework

Does this mean that the government should consolidate the budget by increasing the role of consumption taxation? This depends on the goals of the government; in particular, how each goal is weighted. Clearly, increasing the rate of value-added tax is least costly in terms of employment, at any time-horizon considered. However, there are trade-offs. Specifically, household consumption declines considerably after this policy, and this policy is the most harmful for household consumption. Should the government care more about the number of unemployed or about the amount of consumption of the society as a whole? This raises further questions. Does inequality increase more when more people are unemployed, or does inequality increase more when household consumption declines more? Inequality is related to the progressivity of the tax system; while labor income taxation is often progressive, consumption taxation is always regressive. A drawback of this paper’s model is that - due to the representative agent assumption - no inequality measure can be defined, leaving me unable to answer these important questions. Also, do we think that, as time goes by, it is more difficult to leave unemployment? If so, then the less time that passes since losing a job, the higher the probability of finding another one. In this case, a decline in consumption might be less harmful than an increase in unemployment from a longer-term point of view.
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Hysteresis in a New Keynesian Model

Hysteresis in a New Keynesian Model

Dynamics of inflation and interest rates are shown in Fig. 8. The decrease in productivity is a negative supply shock, and is therefore inflationary; while this also creates an output gap, under the chosen parameters, the net effect through the Taylor rule is an increase in interest rates. In the absence of hys- teresis, vacancies drop sharply immediately after the shock, reducing labor mar- ket tightness and real marginal cost, so the increases in inflation and interest rates are less in the first period, but then higher in the second period, when vacancies recover quickly and marginal cost rises. With hysteresis, because of the smoother dynamics of unemployment and vacancies, there is more inflation and a larger increase in interest rates in the first period, but not a large jump in the second period. With hysteresis, inflation and interest rates return to their steady states more slowly over time.
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Fiscal Calculus in a New Keynesian Model with Labor Market Frictions

Fiscal Calculus in a New Keynesian Model with Labor Market Frictions

The results from our calibrated model are as follows. Government expenditure in the form of aggregate demand stimuli produces low to nearly zero multipliers. Thus, in comparison to the standard New Keynesian model the expansionary effects of aggregate demand stimuli are much lower in a model with matching frictions. When distortionary taxation is used, multipliers become even negative. To understand the reason for this results we compare our model with an RBC model with non-walrasian labor markets. In such a model an increase in aggregate demand can be accommodated if firms post more vacancies. For this to become an equilibrium outcome, the continuation value of a filled vacancy needs to be higher than its steady state value, which in turn requires an increase in the stochastic discount factor and in current consumption. However, due to the crowding-out effect, current consumption falls, therefore implying a fall in current vacancy posting. The fall in vacancy posting brings about a fall in employment and output. Our results show, on the other side, that when the fiscal stimulus takes the form of subsidy to cost of posting vacancies, fiscal multipliers turn positive and become significantly large. A reduction in the cost of posting vacancies boosts job creation, which in turn induces an increase in employment and output. This effect is particularly powerful when the model features inefficient unemployment fluctuations, which occur to the extent that the Hosios condition does not hold. In this case indeed the fall in the cost of posting vacancies also reduces the distortions present in the economy, therefore moving the long run level of output toward the potential one. We re-examine our results by adding to the model an endogenous participation decision, which induces frictions on the labor supply and involuntary unemployment on top and above inefficient fluctuations in unemployment. Even in this case multipliers are smaller than one and turn negative with distortionary taxation, showing that the fiscal stimulus is ineffective in boosting workers’ participation decisions.
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Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment

Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment

Equation (36) points to a number of properties of strict inflation targeting poli- cies. First, the volatility of unemployment under that policy regime is propor- tional to γ , the degree of wage rigidities, since the coefficients b and c are indepen- dent of that parameter. Second, the unemployment rate displays some intrinsic persistence, i.e. some serial correlation beyond that inherited from productiv- ity. The degree of intrinsic persistence is given by coefficient b, which was equal to (1 − δ)(1 − x) under the simplifying approximations made in the previous sections, and very close to it under plausible parameter calibrations, as shown below. Thus, the degree of intrinsic unemployment persistence depends critically on the separation rate δ and the steady state job finding rate x. In a ”sclerotic” labor market, that is, a market with low x and low δ, and under strict inflation targeting, unemployment will display strong persistence, well beyond that inher- ited from productivity. Persistence will be much lower in a fluid labor market, a market with high x and high δ. 10
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Labor markets and monetary policy: A new-Keynesian model with unemployement

Labor markets and monetary policy: A new-Keynesian model with unemployement

Shimer (2005) and Hall (2005) were the first to integrate (2) and (3). Shimer argued that, in the standard DMP model with Nash bargaining, wages were too flexible, and the response of unemployment to productivity shocks was too small. Hall (2005) showed first the scope for and then the implications of real wage rigidities in that class of models. These models differ from ours because of their assumption of linear preferences (in addition to their being purely real models). We have shown earlier the implications of this difference. But our results, using a standard utility specification, reinforce their conclusion that real wage rigidities are probably needed to explain fluctuations.
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Overtime Labor, Employment Frictions, and the New Keynesian Phillips Curve

Overtime Labor, Employment Frictions, and the New Keynesian Phillips Curve

Νοτιχεαβλψ, Ρυδδ ανδ Wηελαν 2007 θυεστιον τηε αβιλιτψ οφ τηεσε mοδελσ το …τ τηε δατα ιν παρτιχυλαρ στατιστιχαλλψ ινσιγνι…χαντ εστιmατεσ οφ τηε οϖεραλλ σλοπε χοε′χιεντ ον mαργιναλ χοστ αν[r]

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A New Keynesian Model with Unemployment

A New Keynesian Model with Unemployment

Hiring costs, together with the fact that it takes time for unemployed workers to find a job, lead to a surplus associated with existing employment relationships, with the wage determining how that surplus is split between firms and work- ers. We examine the consequences of two alternative wage setting structures for equilibrium. Under Nash-bargaining we recover the property of a constant un- employment rate which characterizes the constrained efficient allocation, though in the decentralized economy the implied level of unemployment is generally in- efficient. That result of constant equilibrium unemployment, which stands in contrast to Pissarides (2000) and Shimer (2005), among others, comes from the fact that, under our utility specification, the reservation wage, rather than being constant, increases in proportion to consumption and thus with productivity. The proportional increase in real wages and productivity leaves all labor market flows unaffected.
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