Policy Selection And Macroeconomic Fluctuations

In the situation of the world economy is increasingly integrated and the deepening of our country’s economic reform is going on, labor relationship between workers and firms becomes one of the most important social and economic relations to build a harmonious society. However the presence of labor market frictions which is the job match and search mechanism, seriously affects the effectiveness of our country’s macroeconomic regulation. Therefore, it has great significance to study the impact of the fiscal policy and monetary policy to our country’s macroeconomic fluctuations with the presence of the labor market frictions.Based on the relevant research results of our country and abroad, this paper constructs an open economy New Keynesian DSGE model which includes the family, manufacturers, government department and the labor market frictions. We try to study the effects of fiscal policy shocks and monetary policy shock on the output, employment and inflation in an open economic environment with the labor market frictions. We also try to study the main source of our country’s macroeconomic fluctuations. What’s more, referring to the parameter calibration values in the domestic and foreign relevant research,we calibrate the related parameters in the model with using the calibration method and solve the model. Then, we use the Bayesian estimation method to estimate the model’s parameters with the macroeconomic data of our country. Next, we use the obtained results of the parameters to simulate the model. We get the main macroeconomic variables’impulse response functions to the fiscal policy shock and the monetary policy shock. By observing the impulse response function, we try to research the impact of fiscal policy and monetary policy on output, employment and inflation. At the same time we use the variance decomposition methods to study the main cause of macroeconomic fluctuations. The study finds that:The temporary technology shock and the monetary policy shock are the two main causes of our country’s macroeconomic fluctuations; Increasing the government spending can curb the output and the employment, and it also raises the inflation, this is because that the labor market frictions exists in the economy and fiscal policy has the crowding effect; Increasing the money supply can promote the output and the employment, however it also raises the inflation,but the employment changes far less than that of the output because of the existence of labor market frictions. Based on the conclusions, this paper provides the appropriate policy reference for the policy makers. Finally, this paper discusses the direction and prospects for the development of the open economy New Keynesian DSGE model with labor market frictions.