IWH Research Seminar in Economics Montag, 21. November 2016, 14:15 – 15:45 Uhr, Konferenzsaal im Erdgeschoss Uncertainty, Wages, and the Business Cycle Professor Federico Ravenna, PhD, Institute of Applied Economics, HEC Montréal We show that occasional deviations from effcient wage-setting generate strong and statedependent amplication of exogenous uncertainty shocks and contribute to explain the observed countercyclicality of empirical measures of aggregate uncertainty. Central to our analysis is the existence of matching frictions in the labor market and an occasionally binding constraint on downward wage adjustment. The wage constraint enhances the concavity of the firms’ hiring rule, generating an endogenous profit-risk premium. In turn, uncertainty shocks increase the profit-risk premium when the economy operates close to the wage constraint. This implies that higher uncertainty can severely deepen a recession although its impact is weaker on average. Additionally, the variance of the unforecastable component of future economic outcomes always increases at times of low economic activity. Thus, measured uncertainty rises in a recession even in the absence of uncertainty shocks. We obtain our results using a fourth-order Taylor expansion to the model policy functions, approximating the non-convexity in the wage decision rule with a novel implementation of penalty function methods. Wissenschaftlicher Ansprechpartner am IWH: B 100 Markt Kleine Märkerstraße 8, D-06108 Halle (Saale) Ulrichskirche A 14 Magdeburg Le ip zig er Str aß e ChristianWolf-Straße Rannische Tel +49 345 7753 60, Fax +49 345 7753 820 IWH Kleine Märkerstraße e Große Märkerstraße erstraß Schme Leibniz-Institut für Wirtschaftsforschung Halle (IWH) Leipzig/Halle A 9 Berlin Volkmannstraße Tel +49 345 7753 865, [email protected] A 14 Flughafen g 7 B+B Parkhaus GmbH & Co. KG Hansering 21 06108 Halle (Saale) rin nse vGusta f-Straße Anlau Ha Felix Pohle, M.Sc. Kutschgasse Sternstraße APCOA Parkhaus Ritterhaus Kleine Brauhausstr. 7 06108 Halle (Saale) Leipziger Turm Riebe c Straße Große Brauhausstraße www.iwh-halle.de 7 Franckeplatz A 38 Plat z k7 7 Waisenhausring 7 Franckestraße B 91 Hauptbahnhof
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