LONG‐TERM GROWTH AND SHORT‐TERM VOLATILITY: THE LABOUR MARKET NEXUS*

Abstract

We study the relationship between growth and variability in a growth DSGE model with nominal rigidities and learning‐by‐doing. We show this relationship may be positive or negative depending on the source of fluctuations. A key role is played by labour market features. We find that monetary shocks volatility will generally have a negative effect on growth, while the opposite is true for fiscal and productivity shocks. These findings are consistent with empirical evidence, as data show an ambiguous relationship between output growth and its variance, but a negative relationship between output growth and nominal variability.

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