Template-Type: ReDIF-Paper 1.0
Author-Name: Miguel Angel Santos
Author-Email: miguel_santos@hks.harvard.edu
Author-Workplace-Name: Center for International Development at Harvard University
Author-Person: psa1518
Title: The Right Fit for the Wrong Reasons: Real Business Cycle in an Oil-Dependent Economy
Abstract: Venezuela is an oil-dependent economy subject to large exogenous shocks, with a rigid labor market. These features go straight at the heart of two weaknesses of real business cycle (RBC) theory widely reported in the literature: Neither shocks are volatile enough nor real salaries are sufficiently flexible as required by the RBC framework to replicate the behavior of the economy. We calibrate a basic RBC model and compare a set of relevant statistics from RBC-simulated time series with actual data for Venezuela and the benchmark case of the United States (1950-2008). In spite of Venezuela being one of the most heavily intervened economies in the world, RBC-simulated series provide a surprisingly good fit when it comes to the non-oil sector of the economy, and in particular for labor markets. Large restrictions on dismissal and widespread minimum (nominal) wage put all the burden of adjustment on prices; which translate into highly volatile real wages.
Creation-Date: 2015-09
Classification-JEL: E10, E32, O47, O54, Q32
Keywords:  Macroeconomics, RBC, oil shocks, labor markets, Venezuela
Number: 58
Handle: RePEc:glh:wpfacu:58
File-Url: https://www.hks.harvard.edu/sites/default/files/centers/cid/files/publications/fellow_graduate_student_working_papers/Santos_64.pdf
File-Format: application/pdf