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Financial Risk and Unemployment

Author

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  • Eckstein, Zvi
  • Setty, Ofer
  • Weiss, David

Abstract

There is a strong correlation between the corporate interest rate (BAA rated), and its spread relative to Treasuries, and the unemployment rate. We model how interest rates and potential default rates impact equilibrium unemployment in a Diamond-Mortesen-Pissarides model. We calibrate the model using US data without targeting business cycle statistics. Volatility in the corporate interest rate can explain about 80% of the volatility of unemployment, vacancies, and market tightness. Simulating the Great Recession shows the model can account for much of the rise in unemployment. Without Fed action, unemployment would have been 6% higher.

Suggested Citation

  • Eckstein, Zvi & Setty, Ofer & Weiss, David, 2015. "Financial Risk and Unemployment," CEPR Discussion Papers 10596, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10596
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    References listed on IDEAS

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    1. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
    2. Nicolas Petrosky-Nadeau & Lu Zhang, "undated". "Unemployment Crises," GSIA Working Papers 2013-E5, Carnegie Mellon University, Tepper School of Business.
    3. Filippo Ippolito & Ali K. Ozdagli & Ander Pérez Orive, 2013. "Is bank debt special for the transmission of monetary policy? Evidence from the stock market," Economics Working Papers 1384, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
    5. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Cycles économiques, Banques centrales et notions de crises
      by Antoine Enrouol in RachatDuCredit.com on 2016-06-09 19:50:22

    Citations

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    Cited by:

    1. Melvyn G. Coles & Ali Moghaddasi Kelishomi, 2018. "Do Job Destruction Shocks Matter in the Theory of Unemployment?," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(3), pages 118-136, July.
    2. Alessandro Gavazza & Simon Mongey & Giovanni L. Violante, 2018. "Aggregate Recruiting Intensity," American Economic Review, American Economic Association, vol. 108(8), pages 2088-2127, August.
    3. Imen Ben Mohamed & Marine Salès, 2015. "Credit imperfections, labor market frictions and unemployment: a DSGE approach," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01082491, HAL.
    4. Yulia Moiseeva, 2020. "The Interaction between Credit and Labor Market Frictions," Discussion Paper Series, School of Economics and Finance 202007, School of Economics and Finance, University of St Andrews.
    5. Yinqiu Lu & Sophia Chen, 2018. "Does Balance Sheet Strength Drive the Investment Cycle? Evidence from Pre- and Post-Crisis Cyprus," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 12(1), pages 3-27, June.
    6. repec:esx:essedp:766 is not listed on IDEAS
    7. Hall, R.E., 2016. "Macroeconomics of Persistent Slumps," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2131-2181, Elsevier.
    8. Finkelstein Shapiro, Alan & Olivero, Maria Pia, 2020. "Lending relationships and labor market dynamics," European Economic Review, Elsevier, vol. 127(C).
    9. Jessica Wachter & Mete Kilic, 2017. "Risk, Unemployment, and the Stock Market: A Rare-Event-Based Explanation of Labor Market Volatility," 2017 Meeting Papers 129, Society for Economic Dynamics.
    10. Boeri, Tito & Jimeno, Juan F., 2016. "Learning from the Great Divergence in unemployment in Europe during the crisis," Labour Economics, Elsevier, vol. 41(C), pages 32-46.
    11. Imen Ben Mohamed & Marine Salès, 2015. "Credit imperfections, labor market frictions and unemployment: a DSGE approach," Working Papers hal-01082491, HAL.

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    More about this item

    Keywords

    business cycles; corporate interest rates; equilibrium unemployment; Great Recession; interest rate spread; search and matching models;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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