Working Paper: NBER ID: w17084
Authors: Jordi Gal; Frank Smets; Rafael Wouters
Abstract: We reformulate the Smets-Wouters (2007) framework by embedding the theory of unemployment proposed in Galí (2011a,b). We estimate the resulting model using postwar U.S. data, while treating the unemployment rate as an additional observable variable. Our approach overcomes the lack of identification of wage markup and labor supply shocks highlighted by Chari, Kehoe and McGrattan (2008) in their criticism of New Keynesian models, and allows us to estimate a "correct" measure of the output gap. In addition, the estimated model can be used to analyze the sources of unemployment fluctuations.
Keywords: New Keynesian; Unemployment; Wage Markup; Labor Supply
JEL Codes: D58; E24; E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wage markup shocks (J39) | Output fluctuations (E39) |
| Wage markup shocks (J39) | Employment fluctuations (J63) |
| Unemployment (J64) | Estimated impact of wage markup shocks on output and employment (F66) |
| Labor supply shocks (J20) | Output fluctuations (E39) |
| Labor supply shocks (J20) | Employment fluctuations (J63) |
| Demand shocks (E39) | Unemployment fluctuations (J64) |
| Wage markup shocks (J39) | Unemployment fluctuations (J64) |
| Wage markups (J31) | Output gap (E23) |
| Estimated output gap (E23) | Unemployment rate (J64) |