Endogenous job destruction risk and aggregate demand shortages

Nicolò Gnocato

No 1444, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper studies, analytically and quantitatively, the occurrence of demand-deficient recessions due to uninsurable unemployment risk when jobs are endogenously destroyed. The ensuing unemployment fears induce a precautionary saving motive that counteracts the desire to borrow during recessions: negative productivity shocks may cause falling natural interest rates and positive unemployment gaps. Analytically, these demand-deficient recessions are shown to require a lesser degree of real wage rigidity when jobs are destroyed endogenously rather than exogenously. Quantitatively, the demand-deficient nature of supply-driven recessions can only be captured when accounting for endogenous job destruction.

Keywords: heterogeneous agents; unemployment risk; endogenous separation; Keynesian supply shocks (search for similar items in EconPapers)
JEL-codes: E12 E21 E24 E32 J64 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1444_24

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