FINANCIAL RISK AND UNEMPLOYMENT

Zvi Eckstein (), Ofer Setty and David Weiss

International Economic Review, 2019, vol. 60, issue 2, 475-516

Abstract: There is a strong correlation between corporate interest rates, their spreads relative to Treasuries, and the unemployment rate. We model how corporate interest rates affect equilibrium unemployment and vacancies, in a Diamond–Mortesen–Pissarides search and matching model. Our simple model permits the exploration of U.S. business cycle statistics through the lens of financial shocks. We calibrate the model using U.S. data without targeting business cycle statistics. Volatility in the corporate interest rate can explain a quantitatively meaningful portion of the labor market. Data on corporate firms support the hypothesis that firms facing more volatile financial conditions have more volatile employment.

Date: 2019
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https://doi.org/10.1111/iere.12360

Related works:
Working Paper: Financial Risk and Unemployment (2015)
Working Paper: Financial Risk and Unemployment (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:iecrev:v:60:y:2019:i:2:p:475-516

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