What drives fluctuations of labor wedge and business cycles? Evidence from Japan

The literature has empirically shown that the labor wedge worsens during recessions. Taking this statement into consideration, study poses two questions: First, what is main driving force of wedge, and second, driver same as business cycles? In study, we employ a commonly used medium-scale dynamic stochastic general equilibrium model with nominal real frictions to analyze which structural shocks drive fluctuation cycles. estimated using Japanese data. Our estimation strategy particularly novel approach. standard Bayesian estimation, prior distribution parameters for deviations inverse gamma distribution, does not support zero value assumes existence shocks. By contrast, more flexible measurement errors allow non-existence Under results imply mainly driven by preference transitory technology shocks, whereas investment adjustment cost shock most important cycle fluctuations. However, under our relaxed allows both cycles are permanent