Financial Risk and Unemployment

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. * Manuscript . 2 Baa is a credit rating of corporate default risk. For the U.S. Treasury, we use the five-year Constant Maturity Rate. We frequently refer to the corporate interest rate as the interest rate and to the corporate interest rate spread relative to the five-year Treasury interest rate as the spread. We always use real interest rates under a variety of definitions of inflation. The interest rate spread is unaffected by inflation. 3 We choose the time period 1982-2012, as Gali and van Rens (2014) claim that during this time, labor productivity became less procyclical, opening the door for other mechanisms to be explored. Jermann and Quadrini (2012) use a similar time period in their analysis of financial shocks and the macroeconomy. We include both lagged and contemporaneous values here for completeness. During the rest of the article, unless otherwise specified, we use only contemporaneous values. 475 C (2018) by the

Do Natural Disasters Increase Financial Risks? An Empirical Analysis

“…Note that foreign debt differs from central government debt. (6) We also follow Eckstein et al (2019), who conclude that financial risks increase when the unemployment rate rises. We thus use the ratio of unemployment to the total labor force (Unem) to assess the level of unemployment (Hall, 2017).…”

Revisiting the Hypothesis of High Discounts and High Unemployment

“…We calibrate , which determines the shape of the Weibull distribution, so as to minimize the distance between the shape of the tenure pro…les in the model and in the data. 8 We set to 0:1% per month, some low, positive value to guarantee that the stationary distribution of workers across employment states is non-degenerate for any choice of the match quality distribution. 9 Lastly, we need to choose values for the parameters , and b.…”

“…It is worth noting that, if we use the direct measures of the EU and EE rates, our qualitative …ndings on the e¤ect of an increase in the discount rate do not change. 8 The logic behind the calibration strategy is straightforward and well-established (see, e.g., Menzio and Shi 2011, Menzio, Telyukova and Visschers 2016, or Gregory, Menzio and Wiczer 2020). Taking as given the other parameters: an increase in k lowers the UE rate; an increase in raises the EE rate; an increase in raises F (R) and, thus, the EU rate; an increase in raises the rate at which the match quality is discovered and, thus, the fraction of jobs that terminate in less than one year; an increase in raises the rate at which the quality of a match is reset and, hence, the EU and EE rates at long tenures.…”

Macroeconomics of Persistent Slumps

“…Other contributions relating to discounts and confidence include Kozlowski, Veldkamp and Venkateswaran (2015), Farmer (2012), He and Krishnamurthy (2013), Gourio (2012), Bianchi et al (2012), Lustig, Van Nieuwerburgh and Verdelhan (2013), and Eckstein, Setty and Weiss (2015). A related topic is the role of fluctuations in uncertainty as a driving force-see Ludvigson, Ma and Ng (2015) for cites and discussion.…”