Search Results
Working Paper
Endogenous Labor Supply in an Estimated New-Keynesian Model: Nominal versus Real Rigidities
Standard macroeconomic models find it difficult to reconcile slow recoveries and missing disinflations after deep deteriorations in the labor market. We develop and estimate a New-Keynesian model with search and matching frictions in the labor market, endogenous intensive and extensive labor supply decisions, and financial frictions. We conclude that the estimated combination of a low degree of nominal wage rigidities and a high degree of real wage rigidities, together with a small role for pre-match costs relative to post-match costs, is key in successfully forecasting slow recoveries in ...
Working Paper
Elasticities of Labor Supply and Labor Force Participation Flows
REVISED MARCH 2019 Using a representative-household search and matching model with endogenous labor force participation, we study the interactions between extensive-margin labor supply elasticities and the cyclicality of labor force participation flows. Our model successfully replicates salient business-cycle features of all transition rates between three labor market states, the unemployment rate, and the labor force participation rate, while using values of elasticities consistent with micro evidence. Our results underscore the importance of the procyclical opportunity cost of employment, ...
Working Paper
Monetary Policy Tradeoffs and the Federal Reserve's Dual Mandate
Some key structural features of the U.S. economy appear to have changed in the recent decades, making the conduct of monetary policy more challenging. In particular, there is high uncertainty about the levels of the natural rate of interest and unemployment as well as about the effect of economic activity on inflation. At the same time, a prolonged period of below-target inflation has raised concerns about the unanchoring of inflation expectations at levels below the Federal Open Market Committee’s inflation target. In addition, a low natural rate of interest increases the probability of ...
Working Paper
The Cyclicality of Labor Force Participation Flows: The Role of Labor Supply Elasticities and Wage Rigidity
Using a representative-household search and matching model with endogenous labor force participation, we study the cyclicality of labor market transition rates between employment, unemployment, and nonparticipation. When interpreted through the lens of the model, the behavior of transition rates implies that the participation margin is strongly countercyclical: the household’s incentive to send more workers to the labor force falls in expansions. We identify two key channels through which the model delivers this result: (i) the procyclical values of non-market activities and (ii) wage ...
Working Paper
Labor Market Discrimination and the Racial Unemployment Gap: Can Monetary Policy Make a Difference?
Black workers experience a higher unemployment rate, as well as more volatile employment dynamics, than white workers, and the racial unemployment rate gap is largely unexplained by observable characteristics. We develop a New Keynesian model with search and matching frictions in the labor market, endogenous separations, and employer discrimination against Black workers to explain these outcomes. The model is consistent with key features of the aggregate economy and is able to explain key labor market disparities across racial groups. We then use this model to assess the effects of the ...
Working Paper
Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability
Why do more educated workers experience lower unemployment rates and lower employment volatility? A closer look at the data reveals that these workers have similar job finding rates, but much lower and less volatile separation rates than their less educated peers. We argue that on-the-job training, being complementary to formal education, is the reason for this pattern. Using a search and matching model with endogenous separations, we show that investments in match-specific human capital reduce the outside option of workers, implying less incentives to separate. The model generates ...
Working Paper
Monetary Policy and Financial Stability
The 2008 Global Financial Crisis called into question the narrow focus on price stability of inflation targeting regimes. This paper studies the relationship between price stability and financial stability by analyzing alternative monetary policy regimes for an economy that experiences endogenous financial crises due to excessive household sector leverage. We reach four conclusions. First, a central bank can improve both price stability and financial stability by adopting an aggressive inflation targeting regime, in the absence of the zero lower bound (ZLB) constraint on nominal interest ...
Working Paper
Market Power, Inequality, and Financial Instability
Over the last four decades, the U.S. economy has experienced a few secular trends, each of which may be considered undesirable in some aspects: declining labor share; rising profit share; rising income and wealth inequalities; and rising household sector leverage and associated financial instability. We develop a real business cycle model and show that the rise of market power of the firms in both product and labor markets over the last four decades can generate all of these secular trends. We derive macroprudential policy implications for financial stability.