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The Right Fit for the Wrong Reasons: Real Business Cycle in an Oil-Dependent Economy

CID Research Fellow & Graduate Student Working Paper No. 64

Miguel Santos
September 2015

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.

Keywords: Macroeconomics, RBC, oil shocks, labor markets, Venezuela

JEL codes: E10, E32, O47, O54, Q32