Asset returns, the business cycle, and the labor market

We review the labor market implications of recent real business cycle and New Keynesian models that successfully replicate the empirical equity premium. We document the fact that all models reviewed in this paper that do not feature either sticky wages or immobile labor between two production sectors as in Boldrin, Christiano, and Fisher (2001) imply a negative correlation of working hours and output that is not observed empirically. Within the class of Neo-Keynesian models, sticky prices alone are demonstrated to be less successful than rigid nominal wages with respect to the modeling of the labor market stylized facts. In addition, monetary shocks in these models are required to be much more volatile than productivity shocks to match statistics from both the asset and labor market