Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5101487 | Journal of Monetary Economics | 2017 | 22 Pages |
Abstract
We study a model where households are subject to uninsurable unemployment risk, price setting is subject to nominal rigidities, and the labor market is characterized by matching frictions and inflexible wages. Higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive. Lower goods demand reduces job vacancies and the job finding rate producing an amplification mechanism due to endogenous countercyclical income risk. Amplification derives from the combination of incomplete financial markets and frictional goods and labor markets. The model can account for key features of the Great Recession.
Keywords
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Authors
Morten O. Ravn, Vincent Sterk,