João Madeira

Overtime Labor, Employment Frictions, and the New Keynesian Phillips Curve

This paper presents a New Keynesian (NK) model that is extended to differentiate between straight time and overtime work. The model proposes that the New Keynesian Phillips curve (NKPC) should be estimated with marginal cost measured in terms of overtime labor; the resulting coefficient estimates are in accordance with theory and statistically significant for the hybrid NKPC (which allows for backward-looking price setters) but not for the purely forward-looking NKPC. In the hybrid model, backward-looking behavior is found to be predominant. The paper also shows that the incorporation of employment frictions (predetermined employment and convex adjustment costs) in NK models helps reconcile the frequent price changes found in the microdata with the degree of sluggishness in inflation adjustment to output changes at the macro level.

Fractional Integration of the Price-Dividend Ratio in a Present-Value Model of Stock Prices

We find evidence of antipersistence in returns and dividend growth, while the price-dividend ratio appears to exhibit nonstationary long memory, which seems contradictory in the present-value context. We reconcile these findings by showing that the aggregation of antipersistent expected dividend growth and expected returns gives the price-dividend ratio non-standard properties: a) asymptotically, the moving average coefficients decay hyperbolically at the same rate as the underlying antipersistent expected dividend growth and expected returns series; b) the spectral density at the zero frequency is finite and bounded away from zero as in short memory processes; c) close to zero frequency the spectral density is convex, which can imitate long memory in finite samples. Taking these features into account, we extend and estimate the present-value model by allowing for fractionally integrated processes in expected returns and dividend growth. We show this improves the models forecasting power in-sample and out-of-sample.

Assessing the Empirical Relevance of Labour Frictions to Business Cycle Fluctuations

This paper describes a dynamic stochastic general equilibrium model augmented with labour frictions, namely: indivisible labour, predetermined employment and adjustment costs. This improves the fit to the data as shown by a higher log marginal likelihood and closer match to key business cycle statistics. The labour frictions introduced are relevant for model dynamics and economic policy: the effect of total factor productivity shocks on most macroeconomic variables is substantially mitigated; fiscal policy leads to a greater crowding out of private sector activity and monetary policy has a lower impact on output. Labour frictions also provide a better match to impulse response functions from vector autoregressive models.