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The importance of hiring frictions in business cycles

Faccini, Renato and Yashiv, Eran (2017) The importance of hiring frictions in business cycles. CFM Discussion Paper Series (CFM-DP2017-36). Centre For Macroeconomics, London, UK.

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Abstract

The paper shows that there is an important direct role for hiring frictions in business cycles. This runs counter to key models in several strands of the macroeconomic literature, which imply that hiring frictions are not important per-se. In our model, conventional shocks yield non-standard and non-obvious macroeconomic outcomes in the presence of hiring frictions. Specifically, hiring frictions operate to offset, and possibly reverse, the effects of price frictions. This confluence of frictions has substantial effects. For a sub-set of the parameter space, model outcomes appear “frictionless,” though both hiring frictions and price frictions are at play. For a different sub-space, these interactions between the two frictions generate amplification in the responses of employment and unemployment to technology shocks, rather than friction-induced mitigation of responses. Despite the presence of price rigidity, positive technology shocks may still be expansionary in employment, and the effects of monetary policy shocks may still be negligible. We explain the underlying economic mechanisms and show their empirical implementation. In doing so, we argue in favor of the importance of explicitly using hiring frictions in business cycle modelling.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Discussio...
Additional Information: © 2017 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment (including Inventories); Capacity
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation)
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 13 Mar 2018 09:11
Last Modified: 08 Mar 2020 00:51
URI: http://eprints.lse.ac.uk/id/eprint/87171

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