Monetary policy fails---the labor market is disconnected from macroeconomic policy
Albertini et al. 12 – University of Every; Reserve Bank of New Zealand; Reserve Bank of New Zealand
Julien Albertini, Güneş Kamber, and Michael Kirker, “Estimated Small Open Economy Model With Frictional Unemployment,” Pacific Economic Review, Vol. 17, Iss. 2, Pg. 326-353, 5-17-12, https://onlinelibrary.wiley.com/doi/10.1111/j.1468-0106.2012.00585.x
6. Dynamics of unemployment and vacancies
In the previous section, we show that our model provides a fairly good description of macroeconomic and labour market variables in New Zealand. In this section, our objective is to use our structural model to investigate which shocks are the drivers of unemployment and vacancies in New Zealand. To do so, we analyze the variance decomposition of unemployment and vacancies.
7, 8 present the variance decomposition of vacancies and unemployment. The model is driven by 11 structural shocks. Three of these shocks are directly related to the labour market of the model; namely, the matching efficiency shock, the bargaining power shock and the vacancy posting cost shock. In 7, 8, while we detail the contribution of labour market shocks to the fluctuations in unemployment and vacancies, we group together the contribution of all the other shocks. An inspection of 7, 8 makes it clear that the bulk of variation in both series is due to the disturbances pertaining to the labour market. In particular, most of the variation in unemployment is due to shocks to matching efficiency (which is in line with the results of Krause et al., 2008a in a closed economy model), while most of the variation in vacancies is due to the vacancy posting cost shock. All the other shocks, foreign, domestic and policy, play only a marginal role in explaining cyclical variations in these two key labour market variables.