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Productivity, aggregate demand and unemployment fluctuations

By Regis Barnichon

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

Topics: HD Industries. Land use. Labor
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 2007
OAI identifier: oai:eprints.lse.ac.uk:19694
Provided by: LSE Research Online

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