CERGE-EI

Macro     

Prof. Morten Ravn

University College London, United Kingdom

Abstract: We study a heterogeneous agents model that combines matching frictions in the labor market with incomplete asset markets and nominal rigidities. Workers can experience job terminations that send them into very short term unemployment or more serious job terminations that a longer search process. We show that an increase in job uncertainty decreases aggregate demand which lowers hiring and therefore produces even more job uncertainty and potentially a deep recession. The amplification mechanism is small when asset markets are complete, prices are flexible or unemployment is predominantly short term. With a moderate and empirically plausible amount of change in the composition of unemployment, the model can account for the amplitude of the increase in unemployment during the Great Recession, for the increase in unemployment duration, and for much of the shift and movement along the Beveridge curve.