The Finnish unemployment volatility puzzle

The Finnish unemployment volatility puzzle
06.07.2011 | pdf, 544 Kt

Summary

This paper investigates the unemployment volatility puzzle in Finland. We explore the ability of a New Keynesian dynamic stochastic general equilibrium (DSGE) model with labour market frictions to reproduce key volatilities found in Finnish business cycle data. We contribute with a new data set to the Shimer debate and offer some plausible explanations for the Finnish case. Specific emphasis is put on modelling the wage bargaining framework as well as the cyclical behaviour of distortionary labour taxes. We and that wage rigidity is a promising candidate for explaining Finnish labour market volatilities in the period 1994-2010. Countercyclical taxes are not able to bring the model-implied volatilities close enough to the data if calibrated properly, and they worsen the model in some other dimensions. We also discuss the much larger labour market volatilities of the period 1981-1993. We and that most of the specific features that characterized the Finnish economy in that period, including during the exceptionally deep recession of the early 1990's, are such that they also increase the magnitude of the responses of labour market variables to shocks in our model economy.