Schaal, Edouard2021-09-302021-09-302017Schaal E. Uncertainty and unemployment. Econometrica. 2017 Nov;85(6):1675-721. DOI: 10.3982/ECTA105570012-9682http://hdl.handle.net/10230/48536This 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.application/pdfeng© The Econometric Society 2017. The copyright to this article is held by the Econometric Society, http://www.econometricsociety.org/. It may be downloaded, printed and reproduced only for personal or classroom use. Absolutely no downloading or copying may be done for, or on behalf of, any for-profit commercial firm or for other commercial purpose without the explicit permission of the Econometric Society. For this purpose, contact the Editorial Office of the Econometric Society at econometrica@econometricsociety.org.info:eu-repo/semantics/articlehttp://dx.doi.org/10.3982/ECTA10557UncertaintyVolatilitySearch-and-matchingBusiness cyclesinfo:eu-repo/semantics/openAccess