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Asset Prices and Unemployment Fluctuations / Patrick J. Kehoe, Pierlauro Lopez, Virgiliu Midrigan, Elena Pastorino.
- Format:
- Book
- Author/Creator:
- Kehoe, Patrick J.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w26580.
- NBER working paper series no. w26580
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2019.
- Summary:
- Recent critiques have demonstrated that existing attempts to account for the unemployment volatility puzzle of search models are inconsistent with the procylicality of the opportunity cost of employment, the cyclicality of wages, and the volatility of risk-free rates. We propose a model that is immune to these critiques and solves this puzzle by allowing for preferences that generate time-varying risk over the cycle, and so account for observed asset pricing fluctuations, and for human capital accumulation on the job, consistent with existing estimates of returns to labor market experience. Our model reproduces the observed fluctuations in unemployment because hiring a worker is a risky investment with long-duration surplus flows. Intuitively, since the price of risk in our model sharply increases in recessions as observed in the data, the benefit from creating new matches greatly drops, leading to a large decline in job vacancies and an increase in unemployment of the same magnitude as in the data.
- Notes:
- Print version record
- December 2019.
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