Wang, B. (2022) Can the stochastic discount factor explain unemployment fluctuations? Working Paper. Sheffield Economic Research Paper Series, 2022006 (2022006). Department of Economics, University of Sheffield ISSN 1749-8368
Abstract
Recent developments in Macro-labor show that discount rates may play an important role in unemployment fluctuations. This paper examines this hypothesis by using a standard search model of equilibrium unemployment with the canonical consumption-based stochastic discount factor. When the discount rate is inferred from data on real consumption in the U.S., little fluctuations in unemployment are generated from the model. Moreover, a counterfactual positive correlation between consumption growth and unemployment emerges from the model. This contradicts the post-war U.S. data. Those results hold even if the model contains habit formation in consumption and the wage is assumed to be invariant to discounts. The paper also studies the role of other factors in amplifying the impact of the discount rate shock, including endogenous job separation, variations in firms’ profit per worker and the risk premium.
Metadata
Item Type: | Monograph |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2022 The Author(s). For reuse permissions, please contact the Author(s). |
Keywords: | search frictions; discount rates; unemployment fluctuations |
Dates: |
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Institution: | The University of Sheffield |
Academic Units: | The University of Sheffield > Faculty of Social Sciences (Sheffield) > Department of Economics (Sheffield) > Sheffield Economics Research Papers Series The University of Sheffield > Faculty of Social Sciences (Sheffield) > Department of Economics (Sheffield) |
Depositing User: | Symplectic Sheffield |
Date Deposited: | 25 Apr 2022 12:50 |
Last Modified: | 21 Nov 2022 13:21 |
Published Version: | https://www.sheffield.ac.uk/economics/research/ser... |
Status: | Published |
Publisher: | Department of Economics, University of Sheffield |
Series Name: | Sheffield Economic Research Paper Series |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:185769 |