Long-run Unemployment and Macroeconomic Volatility
CEIS Research Paper
This paper develops a DSGE model with downward nominal wage rigidity, in which aggregate price and productivity dynamics are exogenously determined by independent Brownian motions with drift. As a result, the long-run expected value of unemployment depends positively on the drift coe¢ cients and negatively on the volatility coe¢ cients of both price and productivity growth processes. Model prescriptions are empirically tested by using a dataset including a wide sample of OECD countries from a period spanning from 1961 to 2011. Panel regressions with fixed effects and time dummies confirm the expected relation of inflation and productivity with unemployment at low frequencies. Long-run unemployment is negatively correlated with the levels of inflation and productivity growth, and positively with their volatilities.
Keywords: Long-run unemployment, Downward Nominal Wage Rigidity, Volatility, In?ation targeting, DSGE model, Cross-country panel data.
JEL codes: E12,E24,E31,C23
Date: Friday, July 7, 2017
Revision Date: Friday, July 7, 2017