Debt Constraints and Employment

Kehoe, Patrick J.; Pastorino, Elena; Midrigin, Virgiliu

doi:10.21034/sr.536

Cited by 30 publications

(45 citation statements)

References 21 publications

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“…We relax the perfect-insurance assumption from this framework. Krusell, Mukoyama, and Sahin (2010), Nakajima (2012) and, more recently, Kehoe, Midrigan, and Pastorino (2014) analyze imperfect-insurance models with search frictions wherein the idiosyncratic unemployment risk faced by households is endogenized through firms' job creation policy. These models assume flexible prices, implying that only the aggregate supply effect is operative.…”

mentioning

confidence: 99%

Precautionary saving and aggregate demand

Challe¹,

Matheron

Ragot³

et al. 2017

Quantitative Economics

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We construct, and then estimate by maximum likelihood, a tractable dynamic stochastic general equilibrium model with incomplete insurance and heterogenous agents. The key feature of our framework is that cross-sectional heterogeneity remains finite dimensional. The solution to the model thus admits a statespace representation that can be used to recover the distribution of the model's parameters. Household heterogeneity expands the set of observables to crosssectional moments available at the business-cycle frequency (in addition to the Edouard Quantitative Economics 8 (2017) usual macro and monetary time series). Incomplete insurance gives rise to a precautionary motive for holding wealth that propagates aggregate shocks via (i) a stabilizing aggregate supply effect, working through the supply of capital, and (ii) a destabilizing aggregate demand effect coming from the feedback loop between unemployment risk and precautionary saving. Using the estimated model to measure the contribution of precautionary savings to the propagation of recent recessions, we find strong aggregate demand effects during the Great Recession and, to a lesser extent, during the 1990-1991 recession. In contrast, the supply effect at least offsets the demand effect during the 2001 recession.

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confidence: 99%

Precautionary saving and aggregate demand

Challe¹,

Matheron

Ragot³

et al. 2017

Quantitative Economics

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“…In the data, though, wage growth tends to decline as experience in the labor market accumulates. To accommodate this feature of the data, we consider a more general human capital process as in Kehoe, Midrigan, and Pastorino (2019) in the spirit of that in Sargent (1998, 2008),…”

Section: A More General Human Capital Processmentioning

confidence: 99%

“…We conclude by considering two extensions. First, we examine a more general model of human capital along the lines of Sargent (1998, 2008) and Kehoe, Midrigan, and Pastorino (2019), which captures the feature that observed wages grow faster at low levels than at high levels of labor market experience. We show that our results are robust to accounting for this aspect of the data.…”

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confidence: 99%

Asset Prices and Unemployment Fluctuations

Kehoe

Lopez

Midrigin

et al. 2020

Preprint

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Recent critiques have demonstrated that existing attempts to account for the unemployment volatility puzzle of search models are inconsistent with the procylicality of the opportunity cost of employment, the cyclicality of wages, and the volatility of risk-free rates. We propose a model that is immune to these critiques and solves this puzzle by allowing for preferences that generate time-varying risk over the cycle, and so account for observed asset pricing ‡uctuations, and for human capital accumulation on the job, consistent with existing estimates of returns to labor market experience. Our model reproduces the observed ‡uctuations in unemployment because hiring a worker is a risky investment with long-duration surplus ‡ows. Intuitively, since the price of risk in our model sharply increases in recessions as observed in the data, the bene…t from creating new matches greatly drops, leading to a large decline in job vacancies and an increase in unemployment of the same magnitude as in the data.

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“…In the last part of the paper, we measure the e¤ect of a discount rate shock using a version of the model in which workers accumulate human capital on the job (which is the model of Menzio, Telyukova and Visschers, 2016). The exercise is inspired by Kehoe, Midrigan and Pastorino (2017) and is motivated by two observations. If workers accumulate human capital on the job, the …rm's bene…t of hiring an unemployed worker becomes more backloaded.…”

Section: Introductionmentioning

confidence: 99%

Revisiting the Hypothesis of High Discounts and High Unemployment

2019

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We revisit the hypothesis that labor market ‡uctuations are driven by shocks to the discount rate. Using a model in which the UE and the EU rates are endogenous, we show that an increase in the discount rate leads to a decline in both the UE and the EU rates. In the data, though, the UE and EU rates move against each other at business cycle frequency. Using a lifecycle model with human capital accumulation on the job, we show that an increase in the discount rate does indeed lead to a decline in the aggregate UE rate and to an increase in the aggregate EU rate. However, the decline in the UE rate is larger for younger workers than for older workers and the EU rate increases only for younger workers. In the data, ‡uctuations in the UE and EU rates at the business cycle frequency are nearly identical across age groups.JEL Codes: E24, J63, J64.

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Debt Constraints and Employment

Cited by 30 publications

References 21 publications

Precautionary saving and aggregate demand

Precautionary saving and aggregate demand

Asset Prices and Unemployment Fluctuations

Revisiting the Hypothesis of High Discounts and High Unemployment

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