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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Productivity, aggregate demand and unemployment fluctuations
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 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, and I present a search model with nominal rigidities that can rationalize the empirical findings. In addition, I show that the interaction of hiring frictions and nominal frictions can generate a new propagation mechanism absent in standard New-Keynesian models.


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Regis Barnichon, Productivity, aggregate demand and unemployment fluctuations, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2008-47, 2008.
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Keywords: Unemployment ; Labor productivity
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