Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/81871
Authors: 
Sala, Luca
Söderström, Ulf
Trigari, Antonella
Year of Publication: 
2010
Series/Report no.: 
Sveriges Riksbank Working Paper Series 246
Abstract: 
We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic ineffciency in recent U.S. data: the output gap - the gap between the actual and effcient levels of output - and the labor wedge - the wedge between households' marginal rate of substitution and firms' marginal product of labor. We establish three results. (i ) The output gap and the labor wedge are closely related, suggesting that most ineffciencies in output are due to the ineffcient allocation of labor. (ii ) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii ) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important respects: it does not give clear guidance concerning the effciency of business cycle uctuations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics.
Subjects: 
Business cycles
Effciency
Labor markets
Monetary policy
JEL: 
E32
E24
E52
Document Type: 
Working Paper

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