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Revisiting the Hypothesis of High Discounts and High Unemployment

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Listed:
  • Paolo Martellini
  • Guido Menzio
  • Ludo Visschers

Abstract

We revisit the hypothesis that cyclical fluctuations in unemployment are caused by shocks to the discount rate. We use a rich search-theoretic model of the labor market in which the UE, EU and EE rates are all endogenous. Analytically, we show that an increase in the discount rate lowers the UE rate and, under some natural conditions, it lowers the EU rate. Quantitatively, we show that an increase in the discount rate from 4 to 10% generates a 3.5% decline in the UE rate and a 6% decline in the EU rate. The response of the unemployment rate is minuscule. These findings are at odds with the actual behavior of the US labor market over the business cycle, which features a negative comovement between the UE and EU rates and large unemployment fluctuations. We show that aggregate productivity shocks generate the correct comovement between the UE and EU rates, as well as large unemployment fluctuations.

Suggested Citation

  • Paolo Martellini & Guido Menzio & Ludo Visschers, 2020. "Revisiting the Hypothesis of High Discounts and High Unemployment," NBER Working Papers 27428, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:27428
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    References listed on IDEAS

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    Cited by:

    1. Clymo, Alex, 2020. "Discounts, rationing, and unemployment," European Economic Review, Elsevier, vol. 128(C).

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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