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Revisiting the Hypothesis of High Discounts and High Unemployment

Paolo Martellini (), Guido Menzio () and Ludo Visschers ()

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: We revisit the hypothesis that cyclical fluctuations in unemployment are caused by shocks to the discount rate. We use a rich search-theoretic model of the labor market in which the UE, EU and EE rates are all endogenous. Analytically, we show that an increase in the discount rate lowers the UE rate and, under some natural conditions, it lowers the EU rate. Quantitatively, we show that an increase in the discount rate from 4 to 10% generates a 3.5% decline in the UE rate and a 6% decline in the EU rate. The response of the unemployment rate is minuscule. These findings are at odds with the actual behavior of the US labor market over the business cycle, which features a negative comovement between the UE and EU rates and large unemployment fluctuations. We show that aggregate productivity shocks generate the correct comovement between the UE and EU rates, as well as large unemployment fluctuations.

Keywords: Unemployment Fluctuations; Discount Rate; Human Capital; Lifecycle Earnings (search for similar items in EconPapers)
JEL-codes: E24 J63 J64 (search for similar items in EconPapers)
Pages: 36
Date: 2020-06
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: Revisiting the Hypothesis of High Discounts and High Unemployment (2021) Downloads
Working Paper: Revisiting the Hypothesis of High Discounts and High Unemployment (2020) Downloads
Working Paper: Revisiting the Hypothesis of High Discounts and High Unemployment (2019) Downloads
Working Paper: Revisiting the Hypothesis of High Discounts and High Unemployment (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:296

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