Anticipated versus unanticipated productivity shocks and hours-worked

Abstract

We analyze the relationship between output and hours-worked in the event of anticipated and unanticipated productivity shocks. We develop a small open economy model that includes imported inputs, a cost channel of monetary policy transmission, real wage rigidity, and a central bank that targets inflation, output, and money growth. Both analytical solutions and quantitative simulations confirm that an unanticipated shock generates real exchange rate depreciation, increases output, and decreases both domestic inflation and interest rate. The model generates a positive co-movement between output and hours-worked only when the shock is anticipated, prices are flexible, and monetary policy is sufficiently accommodating.