Abstract for:

Productivity, Aggregate Demand and Unemployment Fluctuations

Régis  Barnichon,  August 2007
Paper No' CEPDP0819: | Full paper

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Keywords: Unemployment Fluctuations; Labor productivity, Search and matching model, New-Keynesian model

JEL Classification: J64; E32; E37; E52

Is hard copy/paper copy available? YES - Paper Copy Still In Print.

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This Paper is published under the following series: CEP Discussion Papers

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Abstract:

This paper presents new empirical evidence on the cyclical behavior of US unemployment that poses a challenge to standard search and matching models. The correlation between cyclical unemployment and the cyclical component of labor productivity switched sign at the beginning of the Great Moderation in the mid 80s: from negative it became positive, while standard search models imply a negative correlation. I argue that the inconsistency arises because search models do not allow output to be demand determined in the short run. I present a search model with nominal rigidities that can rationalize the empirical findings, and I document two new facts about the Great Moderation that can account for the large and swift increase in the unemployment-productivity correlation in the mid-80s.