Template-Type: ReDIF-Paper 1.0
Author-Name: Ginters Buss
Author-X-Name-First: Ginters	
Author-X-Name-Last: Buss
Author-Workplace-Name: Bank of Latvia
Title: Search-and-Matching Frictions and Labour Market Dynamics in Latvia
Abstract: This paper examines, in an estimated, full-fledged New Keynesian DSGE model with Nash wage bargaining, sticky wage and high value of leisure akin to Christiano, Trabandt and Walentin (2011), whether search-and-matching frictions in the labour market can explain aggregate labour market dynamics in Latvia. If vacancies are not observed, the model can, to a reasonable degree, generate realistic variance and dynamics of unemployment and the correlation between unemployment and (latent) vacancies, yet at the expense of too volatile vacancies. As a by-product, one quarter ahead forecasts of hours worked and GDP exhibit less excess volatility and, thus, are more precise compared to a model without search-and-matching frictions. However, if both unemployment and vacancies are observed and a shock to matching efficiency is allowed for, then cyclical behaviour of forecasted vacancies as well as correlation between unemployment and vacancies tend to counter the data (to the advantage of a better fit of vacancy volatility), and the smoothed matching efficiency is counter-intuitively counter-cyclical. Hence the model cannot fit the three statistics – variance of unemployment and vacancies, and correlation between the two, simultaneously.
Creation-Date: 2015-12-10
File-URL: https://www.bank.lv/images/stories/pielikumi/publikacijas/petijumi/wp_4-2015_en.pdf
File-Format: Application/pdf
File-URL: https://www.macroeconomics.lv/sites/default/files/wp_4-2015_en.pdf
File-Format: Application/pdf
Number: 2015/04
Classification-JEL: E0, E3, F0, F4, G0, G1
Keywords: DSGE model, unemployment, small open economy, Bayesian estimation, currency union, forecasting
X-File-Ref: https://repec.bank.lv/refs/wpaper201504.txt
Handle: RePEc:ltv:wpaper:201504