Supply Shocks, Demand Shocks, and Labor Market Fluctuations by ProQuest


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									                                          Supply Shocks, Demand Shocks, and
                                                   Labor Market Fluctuations
                                                                     Helge Braun, Reinout De Bock, and Riccardo DiCecio

                    The authors use structural vector autoregressions to analyze the responses of worker flows, job
                    flows, vacancies, and hours to demand and supply shocks. They identify these shocks by restrict-
                    ing the short-run responses of output and the price level. On the demand side, they disentangle a
                    monetary and nonmonetary shock by restricting the response of the interest rate. The responses
                    of labor market variables are similar across shocks: Expansionary shocks increase job creation, the
                    job-finding rate, vacancies, and hours; and they decrease job destruction and the separation rate.
                    Supply shocks have more persistent effects than demand shocks. Demand and supply shocks are
                    equally important in driving business cycle fluctuations of labor market variables. The authors’
                    findings for demand shocks are robust to alternative identification schemes involving the response
                    of labor productivity at different horizons. Supply shocks identified by restricting productivity
                    generate a higher fraction of impulse responses inconsistent with standard search and matching
                    models. (JEL C32, E24, E32, J63)

                    Federal Reserve Bank of St. Louis Review, May/June 2009, 91(3), pp. 155-78.

              all (2005) and Shimer (2004) argue                              to other shocks as a potential resolution (see Silva
              that the search and matching model                              and Toledo, 2005). These analyses are based on
              of Mortensen and Pissarides (1994)                              the assumption that either the unconditional
              is unable to reproduce the volatility                           moments are driven to a large extent by a particu-
of the job-finding rate, unemployment, and vacan-                             lar shock or the responses of the labor market to
cies observed in the data.1 A growing literature                              different shocks are similar. This article takes a
has attempted to amend the basic Mortensen-                                   step back and asks, What are the contributions of
Pissarides model to match these business cycle                                different aggregate shocks to labor market fluc-
facts.2 Although most of this literature considers                            tuations and how different are the labor market
shocks to labor productivity as the source of                                 responses to various shocks? The labor market
fluctuations, some authors invoke the responses                               variables we analyze are worker flows, job flows,
                                                                              vacancies, and hours. Including both worker
    Also see Andolfatto (1996).                                               flows and job flows allows us to analyze the
    See, for example, Hagedorn and Manovskii (2008) and Mortensen
                                                                              different conclusions authors have reached on
    and Nagypál (2005).                                                       the importance of the hiring versus the separa-

    Helge Braun is a lecturer of economics at Universität zu Köln, Reinout De Bock is an economist at the International Monetary Fund, and
    Riccardo DiCecio is an economist at the Federal Reserve Bank of St. Louis. The authors thank Paul Beaudry, Larry Christiano, Luca Dedola,
    Martin Eichenbaum, Natalia Kolesnikova, Daniel Levy, Dale Mortensen, Éva Nagypál, Frank Smets, Murat Tasci, Yi Wen, and seminar par-
    ticipants at the European Central Bank, Ghent University, 2006 Midwest Macroeconomics Meetings, WEAI 81st Annual Conference,
    University of British Columbia, and the Board of Governors for helpful comments, as well as Steven Davis and Robert Shimer for sharing
    their data. Helge Braun and Reinout De Bock thank the Research Division at the Federal Reserve Bank of St. Louis and the European Central
    Bank, respectively, for their hospitality. Charles Gascon provided research assistance.

    © 2009, The Federal Reserve Bank of St. Louis. The views expressed in this article are those of the author(s) and do not necessarily reflect the
    views of the Federal Reserve System, the Board of Governors, the regional Federal Reserve Banks, or the International Monetary Fund. Articles
    may be reprinted, reproduced, published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full
    citation are included. Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve
    Bank of St. Louis.

F E D E R A L R E S E R V E B A N K O F S T . LO U I S R E V I E W                                                    M AY / J U N E   2009   155
Braun, De Bock, DiCecio

tion margin in driving changes in employment           identified by restricting output and the price level.
and unemployment. Including aggregate hours            The response of labor productivity is positive for
relates our 
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