Casey Mulligan has developed an intriguing real business cycle model which has « no adverse productivity shocks, no shocks to capital markets (these variables just react to events in the labor market), no monetary policy, and no fiscal stimulus. Simply put: I view this as a one (type of) shock recession, and the labor market is ground zero for that shock.
This version of the model has a labor market distortion that gets progressively worse for the two years (2008 & 2009), at which point it partly reverses itself although never getting back to pre-recession levels.”
OK all this seems extremely difficult to believe as a description of the current recession, but surprisingly the model’s simulations do track observed evolutions in labor usage, consumption, labor productivity and investment rather well (see Mulligan’s blog “Supply and demand”, "What Happens Next? Part II", December 9).
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