FINANCIAL RISK AND UNEMPLOYMENT

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 t...

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Bibliographic Details
Published in:International economic review (Philadelphia) 2019-05, Vol.60 (2), p.475-516
Main Authors: Eckstein, Zvi, Setty, Ofer, Weiss, David
Format: Article
Language:English
Subjects:
Business cycles
Economic models
Economic theory
Employment
Interest rates
Labor market
Statistics
Unemployment
Vacancies
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Summary: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.
ISSN:0020-6598
1468-2354
DOI:10.1111/iere.12360