The Effects of Labor Market Disturbances on the Macroeconomic Dynamics in a New Keynesian Model

In this paper, a dynamic stochastic general equilibrium model is designed for Iran, in which in addition to the product market disruptions, labor market disturbances are also considered. In other words, unemployment is considered by applying the theory of unemployment proposed by Gali (2011). The contribution of this paper is that the labor market is assumed to be homogeneous, so that each of the labor forces is specialized in a type of work. In this model, Disruptions in labor market such as market power and wage rigidity has been considered. This paper assumes full risk sharing across individuals and households, so that the work status does not affect the level of consumption. At first, the parameters of the model estimated using Bayesian approach in the period 1384 to 1393. Then, the effects of technology, monetary and labor supply shocks on the dynamics of macroeconomic variables will be discussed. Results of impulse response functions indicate that a negative labor supply shock, a positive monetary shock and a negative technology shock will reduce unemployment. Policymakers can make better choices with the help of knowing these effects.