Labor adjustment costs, macroeconomic shocks and real business cycles in a small open economy

This paper analyses a real business cycle model of a small open economy subjected to productivity, terms-of-trade and fiscal shocks, and characterized by imperfect mobility of labor due to costly adjustment in labor input and job market segmentation. A dynamic and stochastic equilibrium model is used to perform empirical simulations. The model is calibrated to evaluate its ability to rationalize observed business cycle patterns in Cameroon. The results indicate that the model reproduces stylized facts of this country remarkably well. Particularly, terms-of-trade shocks could explain most of the empirical regularities. The inclusion of labor adjustment costs explains the persistence of shocks or longer duration of business cycles.