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Job Destruction and Propagation of Shocks

Wouter J. den Haan, Garey Ramey and Joel Watson
The American Economic Review
Vol. 90, No. 3 (Jun., 2000), pp. 482-498
Stable URL: http://www.jstor.org/stable/117339
Page Count: 17
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Job Destruction and Propagation of Shocks
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Abstract

This paper considers propagation of aggregate shocks in a dynamic general-equilibrium model with labor-market matching and endogenous job destruction. Cyclical fluctuations in the job-destruction rate magnify the output effects of shocks, as well as making them much more persistent. Interactions between capital adjustment and the job-destruction rate play an important role in generating persistence. Propagation effects are shown to be quantitatively substantial when the model is calibrated using job-flow data. Incorporating costly capital adjustment leads to significantly greater propagation.

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