Search-and-Matching Frictions and Labour Market Dynamics in Latvia

Working Paper 4/2015


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.

Keywords: DSGE model, unemployment, small open economy, Bayesian estimation, currency union, forecasting

JEL codes: E0, E3, F0, F4, G0, G1

APA: Bušs, G. (2020, 20. sep.). Search-and-Matching Frictions and Labour Market Dynamics in Latvia . Taken from https://www.macroeconomics.lv/node/2581
MLA: Bušs, Ginters. "Search-and-Matching Frictions and Labour Market Dynamics in Latvia " www.macroeconomics.lv. Tīmeklis. 20.09.2020. <https://www.macroeconomics.lv/node/2581>.
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