Ljungqvist and Sargent in this new paper identify the common channel through which disparate matching models generate big responses of unemployment to movements in productivity.
The fundamental surplus fraction to is the single intermediate channel through which economic forces generating a high elasticity of market tightness with respect to productivity must operate. Differences in the fundamental surplus explain why unemployment responds sensitively to movements in productivity in some matching models but not in others. The role of the fundamental surplus in generating that response sensitivity transcends diverse matching models having very different outcomes along other dimensions that include the elasticity of wages with respect to productivity, and whether or not outside values affect bargaining outcomes.
The Fundamental Surplus
Authors: Lars Ljungqvist, Thomas J. Sargent
From: Stockholm School of Economics – New York University
How to conduct optimal monetary policy when there is uncertainty about the structure of the labor market.
At the core of our analysis lies the idea that policymakers can formulate multiple models that provide a good approximation to the true data-generating process given the available empirical evidence against which these models are assessed. We implement this view in our setup by showing that both the sticky wage and the search and matching model can generate dynamics that are in line with evidence from structural vector autoregressions for reasonable parameter values under the assumption that monetary policy follows an estimated interest rate rule. Putting other empirical evidence aside, this exercise leaves the policymaker with two plausible descriptions of the data-generating process and uncertainty about the true data-generating process.
Without being able to settle on a unique model of the economy, conducting optimal monetary policy is complicated by the fact that the two models have vastly different normative implications.
Employment, Wages and Optimal Monetary Policy
Authors:Â Martin Bodenstein, Junzhu Zhao
From: Federal Reserve Board – National University of Singapore
