Can the Stochastic Discount Factor Explain Unemployment Fluctuations?

Bingsong Wang

No 2022006, Working Papers from The University of Sheffield, Department of Economics

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.

Keywords: search frictions; discount rates; unemployment fluctuations (search for similar items in EconPapers)
JEL-codes: E23 E24 E32 J24 J31 J41 J63 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2022-04
New Economics Papers: this item is included in nep-dge, nep-lma, nep-mac and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:shf:wpaper:2022006

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