This paper studies the impact of time-varying idiosyncratic risk at the establishmentlevel on unemployment fluctuations over 1972–2009. I build a tractable directed searchmodel with firm dynamics and time-varying idiosyncratic volatility. The model allowsfor endogenous separations, entry and exit, and job-to-job transitions. I show that themodel can replicate salient features of the microeconomic behavior of firms and thatthe introduction of volatility improves the fit of the model for standard business ...
This paper studies the impact of time-varying idiosyncratic risk at the establishmentlevel on unemployment fluctuations over 1972–2009. I build a tractable directed searchmodel with firm dynamics and time-varying idiosyncratic volatility. The model allowsfor endogenous separations, entry and exit, and job-to-job transitions. I show that themodel can replicate salient features of the microeconomic behavior of firms and thatthe introduction of volatility improves the fit of the model for standard business cyclemoments. In a series of counterfactual experiments, I show that time-varying risk isimportant to account for the magnitude of fluctuations in aggregate unemployment forpast U.S. recessions. Though the model can account for about 40% of the total increasein unemployment for the 2007–2009 recession, uncertainty alone is not sufficient toexplain the magnitude and persistence of unemployment during that episode.
+