Francesco Zanetti

Labour Market Institutions and Aggregate Fluctuations in a Search and Matching Model

This paper explores the influence of some key institutional features of the labour market on aggregate fluctuations. It uses a dynamic, stochastic, general equilibrium model characterised by search and matching frictions in the labour market and nominal rigidities in the goods market. It finds that firing costs and unemployment benefits can have substantial effects on aggregate fluctuations. Increasing firing costs decreases the volatility of output, employment and job flows, due to the reduction of the mass of jobs sensitive to disturbances and lower incentives for firms to hire and fire workers. Hence, firms adjust to shocks mainly through prices, and inflation then becomes more volatile. Raising unemployment benefits has the reverse effect on aggregate fluctuations.

Labor Market Reform and Price Stability: An Application to the Euro Area

Central bankers frequently suggest that labor market reform may be beneficial for inflation management. This paper investigates this topic by simulating the effects of reductions in firing costs and unemployment benefits on inflation volatility in the Euro Area, using an estimated New Keynesian model with search and matching frictions. Qualitatively, changes in labor market policies alter the volatility of inflation in response to shocks, by affecting the volatility of the three components of real marginal costs (hiring costs, firing costs and wage costs). Quantitatively, we find, however, that neither policy is likely to have an important effect on inflation volatility, due to the small contribution of hiring and firing costs to inflation dynamics.

The Effect of Labor and Financial Frictions on Aggregate Fluctuations

This paper embeds labor market search frictions into a New Keynesian model with financial frictions as in Bernanke, Gertler and Gilchrist (1999). The econometric estimation establishes that labor market frictions substantially improve the empirical fit of the model. The effect of the interaction between labor and financial frictions on aggregate fluctuations depends on the nature of the shock. For monetary policy, technology and entrepreneurial wealth shocks, labor market frictions amplify the effect of financial frictions since robust changes in hiring lead to persistent movements in employment and the return on capital that reinforce the original effect of financial frictions. For cost-push, labor supply, marginal efficiency of investment and preference shocks, labor market frictions dampen the effect of financial frictions by reducing the real cost of repaying existing debt that lowers the exernal finance premium.

NEUTRAL TECHNOLOGY SHOCKS AND THE DYNAMICS OF LABOR INPUT: RESULTS FROM AN AGNOSTIC IDENTIFICATION*

This article studies the dynamic response of labor input to neutral technology shocks. It uses benchmark dynamic, stochastic, general equilibrium models enriched with labor market search and matching frictions and investment‐specific technological progress that enables a new, agnostic, identification scheme based on sign restrictions on a structural vector autoregression (SVAR). The estimation supports an increase of labor input in response to neutral technology shocks. This finding is robust across different perturbations of the SVAR model.

Factor Adjustment Costs: A Structural Investigation

This paper assesses various capital and labour adjustment costs functions estimating a general equilibrium framework with Bayesian methods using US aggregate data. The estimation reveals that the adjustment costs are convex in both capital and labour and allowing for their joint interaction is important. The structural model enables us to identify the response of factor adjustment costs to exogenous disturbances, and to establish that shocks to technology and the job separation rate are key drivers of adjustment costs. However, the analysis shows that factor adjustment costs are unable to explain large fluctuations in the firm’s market value in the data.

Wage Rigidities in an Estimated DSGE Model of the UK Labour Market

We estimate a New Keynesian model with matching frictions and nominal wage rigidities on UK data. We are able to identify important structural parameters, recover the unobservable shocks that have affected the UK economy since 1971 and study the transmission mechanism. With matching frictions, wage rigidities have limited effect on inflation dynamics, despite improving the empirical performance of the model. The reason is that with matching frictions, marginal costs depend on unit labour costs and on an additional component related to search costs. Wage rigidities affect both components in opposite ways leaving marginal costs and inflation virtually unaffected.

Wage Rigidities in an Estimated Dynamic, Stochastic, General Equilibrium Model of the UK Labour Market

We estimate a New Keynesian model with matching frictions and nominal wage rigidities on UK data. We show that in a model with matching frictions, whether nominal wage rigidities are relevant or irrelevant for inflation dynamics depends on the parametrization. At the estimated equilibrium, we find that wage rigidities are irrelevant, despite improving the empirical performance of the model. The reason is that with matching frictions, marginal costs depend on unit labour costs and on an additional component related to search costs. Wage rigidities affect both components in opposite ways leaving marginal costs and inflation virtually unaffected.

Labour Policy Instruments and the Cyclical Behaviour of Vacancies and Unemployment

The standard Mortensen–Pissarides (MP) model cannot match the observed elasticity of vacancies and unemployment in the data. This paper shows that by introducing labour policy instruments, the original MP model can replicate the observed fluctuations in unemployment and job vacancies in response to shocks. These instruments reduce the benefit of forming a match, thereby increasing the impact that shocks have on firms’ incentives to post vacancies, and workers’ to accept job offers. Additionally, the analysis shows that the design of labour policy instruments, e.g. whether taxation is progressive or regressive, has non-trivial consequences on the model’s performance.

Labor Market Frictions, Indeterminacy, and Interest Rate Rules

This paper studies the emergence of indeterminate equilibria in a standard New Keynesian model characterized by labor market frictions, under a policy rule that reacts strictly to inflation. Given labor market frictions, monetary policy may not be able to prevent aggregate fluctuations from being driven solely by self-fulfilling expectations. This is not, though, a result that holds under all circumstances: a monetary policy that reacts to some average measures of inflation or to the output gap may guarantee determinacy in the economy.

Changing macroeconomic dynamics at the zero lower bound

ABSTRACT This article develops a change-point VAR model that isolates four major macroeconomic regimes in the US since the 1960s. The model identifies shocks to demand, supply, monetary policy, and spread yield using restrictions from a general equilibrium model. The analysis discloses important changes to the statistical properties of key macroeconomic variables and their responses to the identified shocks. During the crisis period, spread shocks became more important for movements in unemployment and inflation. A counterfactual exercise evaluates the importance of lower bond-yield spread during the crises and suggests that the Fed’s large-scale asset purchases helped lower the unemployment rate by about 0.6 percentage points, while boosting inflation by about 1 percentage point.