XXV Edition

1-2 December 2016"

Long-run Unemployment and Macroeconomic Volatility

Fasani Stefano, University of Rome Tor Vergata

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 coefficients and negatively on the volatility coefficients 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.

Area: Young Economists Session (YES award)

Keywords: Long-run unemployment, Downward Nominal Wage Rigidity, Volatility, Inflation targeting, DSGE model, Cross-country panel data.

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