Seminar in Economics with Eran Yashiv
2016-02-03 at 15:30
2016-02-03 at 16:45
Sveavägen 65, room 750
Eran Yashiv, Tel. Aviv University
Frictions in DSGE Models: Revisiting New Keynesian vs New Classical Results
We study the interactions between rent-producing hiring and investment frictions on the one hand and price frictions on the other hand in a DSGE model. These turn out to produce major changes in the responses of all key macroeconomic variables to technology and monetary policy shocks, shedding new light on New Keynesian vs New Classical results.
While we reproduce the well-known finding whereby introducing only price frictions into the neoclassical RBC benchmark breaks money neutrality and turns the response of employment to technology shocks from positive to negative, when we also add moderate hiring or investment frictions we find that:
(i) Hiring frictions offset the effects of price frictions, and they do so more strongly than
(ii ) With moderate hiring frictions, a monetary expansion is basically neutral and the
response of employment to technology shocks is positive.
(iii) Both frictions generate endogenous wage rigidity by smoothing the response of the
marginal rate of substitution between consumption and labor to shocks.
(iv) The precise degree of price frictions is less relevant, if not irrelevant, in the propagation
of shocks to real variables.
These results do not stem from full flexibility but rather from a confluence of frictions.