Financial Frictions, Financial Shocks and Labour Market Fluctuations in Canada

What are the effects of financial market imperfections on unemployment and vacancies in Canada? The author estimates the model of Zhang (2011) – a standard monetary dynamic stochastic general-equilibrium model augmented with explicit financial and labour market frictions – with Canadian data for the period 1984Q2–2010Q4, and uses it to examine the importance of financial shocks on labour market fluctuations in Canada. She finds that the estimated value of the elasticity of external finance, the key parameter capturing financial frictions, is much higher than the value suggested in the literature. This gives rise to a larger amplification effect from the financial accelerator mechanism, which helps the model generate a more volatile labour market. The author finds that the model accounts well for the cyclical behaviour of unemployment and vacancies observed in the data. She also finds that financial shocks are one of the main sources of fluctuations in the Canadian labour market. Overall, financial shocks contribute about 30 per cent of the fluctuations in unemployment and vacancies for the Canadian economy.Economic models, Financial markets, Labour markets

Price-Level versus Inflation Targeting with Financial Market Imperfections

This paper compares price-level-path targeting (PT) with inflation targeting (IT) in a sticky-price, dynamic, general equilibrium model augmented with imperfections in both the debt and equity markets. Using a Bayesian approach, we estimate this model for the Canadian economy. We show that the model with both debt and equity market imperfections fits the data better and use it to compare PT versus the estimated current IT regime. We find that in general PT outperforms the current IT regime. However, the gain is lower when financial market imperfections are taken into account.Monetary policy framework; Inflation targets; Economic models

Monetary Policy and the Distribution of Money and Capital

Existing search-theoretical model of money have in general abstracted from the existence and accumulation of other assets, in particular, capital. In this paper we present a model where the optimal portfolio allocation decision of agents is explicitly modeled. Trade frictions in a decentralized consumption goods market give rise to an endogenous role for money. Capital goods are assumed to be type-specific and traded in a centralized market. Uninsurable idiosyncratic uncertainty in production and trading opportunities leads to a non-degenerate distribution of wealth. By focusing on stationary equilibria we characterize numerically the wealth distribution and its composition. We further analyze the effects of monetary policy on the equilibrium patterns of exchange, the distribution of wealth, capital accumulation and welfare. In particular, we show that a moderate expansionary policy, accomplished via lump-sum transfers, can lead to a steady-state increase in aggregate output, aggregate consumption, capital accumulation, and welfaresearch, money, capital, monetary policy, redistribution, wealth

Chute flow experiments

The objective of this thesis is to study the behavior of granular materials flowing down an inclined chute using three diagnostic techniques under different chute inclination angles and chute floor conditions. The three methods are: (1) tracking the motion of single particle within the mass in a noninvasive manner using a transmitting sphere and antenna receiving system, (2) scale mass flow rate measurement, and (3) high speed camera system to obtain flow velocity measurements. For these purposes, an experimental setup has been completed and a set experiments has been performed

Macroprudential Rules and Monetary Policy when Financial Frictions Matter

This paper examines the interaction between monetary policy and macroprudential policy and whether policy makers should respond to financial imbalances. To address this issue, we build a dynamic general equilibrium model that features financial market frictions and financial shocks as well as standard macroeconomic shocks. We estimate the model using Canadian data. Based on these estimates, we show that it is beneficial to react to financial imbalances. The size of these benefits depends on the nature of the shock where the benefits are larger in the presence of financial shocks that have broader effects on the macroeconomy.Economic models; Financial markets; Financial stability; Monetary policy framework

Price Level Targeting in a Small Open Economy with Financial Frictions: Welfare Analysis

How important are the benefits of low price-level uncertainty? This paper explores the desirability of price-level path targeting in an estimated DSGE model fit to Canadian data. The policy implications are based on social welfare evaluations. Compared to the historical inflation targeting rule, an optimal price level targeting regime substantially reduces the welfare cost of business cycle fluctuations in terms of steady state consumption. The optimal price-level targeting rule performs also better than the optimal inflation targeting rule in minimizing the distortion generated by the presence of nominal debt contracts. The occurrence of financial shocks, which are among the main sources of business cycle fluctuations in the model, significantly contributes to quantify the welfare gains of price level targeting.Financial stability; Inflation and prices; Monetary policy framework

Financial Factors and Labour Market Fluctuations

What are the effects of financial market imperfections on unemployment and vacancies? Since standard DSGE models do not typically model unemployment, they abstract from this issue. In this paper I augment a standard monetary DSGE model with explicit financial and labour market frictions and estimate the model using US data for the period 1964:Q1-2010:Q3. I find that the estimated degree of financial frictions is higher when financial data and shocks are included. The model matches the aggregate volatility in the data reasonably well. In particular, for the labour market, the model is able to generate highly volatile unemployment and vacancies, and a relatively rigid real wage. Further, I find that the financial accelerator mechanism plays an important role in amplifying the effects of financial shocks on unemployment and vacancies. Overall, financial shocks explain about 37 per cent of the fluctuations in unemployment and vacancies.Economic models; Financial markets; Labour markets

Unemployment fluctuations in a small open-economy model with segmented labour markets: The case of Canada

The recent financial crisis and subsequent recession have spurred great interest in the sources of unemployment fluctuations. Previous studies predominantly assume a single economy-wide labour market, and therefore abstract from differences across sectorspecific labour markets in the economy. In Canada, such differences are substantial. From 1991 to 2010, employment in the tradable sector is almost three times as volatile as that in the non-tradable sector, and wages are about twice as volatile. To capture the labour market differences at the sectoral level, I introduce a segmented labour market structure to a medium-scale dynamic stochastic general-equilibrium model with financial and labour market frictions and estimate the model using Canadian data from 1991 to 2010. I find that, in the long run, unemployment fluctuations are mainly driven by the shocks to firms' net worth and production technology in the non-tradable sector and the shocks to the foreign interest rate. In the short run, however, it is the shocks to firms' net worth in the tradable sector that account for about 50 per cent of unemployment fluctuations. I also find that inclusion of the recent financial crisis data in the estimation is crucial for assessing the effects of the financial wealth shocks