Show simple item record Ravn, Morten O. Sterk, Vincent 2016-09-26T10:21:43Z 2016-09-26T10:21:43Z 2015-07
dc.description.abstract This paper proposes a theory in which aggregate shocks also produce idiosyncratic risk which in turn introduces a demand channel that we argue is relevant for understanding the Great Recession. We study a model in which households are subject to uninsurable idiosyncratic employment shocks, firms set prices subject to nominal rigidities, and the labor market is characterized by matching frictions and by downward inflexible wages. Higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive amongst employed households. Lower goods demand produces a decline in job vacancies and the ensuing drop in the job finding rate in turn triggers higher precautionary saving setting in motion an amplification mechanism. The amplification mechanism is absent from standard macroeconomic models and depends on the combination of incomplete financial markets and frictional goods and labor markets. The model can account for key features of the Great Recession in response to the observed changes in the job separation rate and an increase in search efficiency heterogeneity estimated from the matching function. We argue that the latter shock is required to reconcile the large increase in the incidence of longer term unemployment observed during the Great Recession.
dc.description.sponsorship The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries ADEMU Working Paper Series;30
dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
dc.title Job uncertainty and deep recessions
dc.type info:eu-repo/semantics/workingPaper
dc.subject.keyword Job uncertainty
dc.subject.keyword Unemployment
dc.subject.keyword Incomplete markets
dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
dc.rights.accessRights info:eu-repo/semantics/openAccess


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