Endogenous Disasters

69 Pages Posted: 4 Jan 2012 Last revised: 9 Jan 2018

Nicolas Petrosky-Nadeau

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Lars-Alexander Kuehn

Carnegie Mellon University - David A. Tepper School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: January 2018

Abstract

Market economies are intrinsically unstable. The standard search model of equilibrium unemployment, once solved accurately with a globally nonlinear algorithm, gives rise endogenously to rare dis- asters. Intuitively, in the presence of cumulatively large negative shocks, inertial wages remain relatively high, and reduce profits. The marginal costs of hiring run into downward rigidity, which stems from the trading externality of the matching process, and fail to decline relative to profits. Inertial wages and rigid hiring costs combine to stifle job creation flows, depressing the economy into disasters. The disaster dynamics are robust to extensions to home production, capital accumulation, and recursive utility.

Keywords: Keywords: Search and matching frictions, the Great Depression, general equilibrium, unemployment, home production, capital accumulation, the equity premium

JEL Classification: E21, E24, E40, G12

Suggested Citation

Petrosky-Nadeau, Nicolas and Zhang, Lu and Kuehn, Lars-Alexander, Endogenous Disasters (January 2018). Charles A. Dice Center Working Paper No. 2012-1; Fisher College of Business Working Paper No. 2012-03-001; American Economic Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1979625 or http://dx.doi.org/10.2139/ssrn.1979625

Nicolas Petrosky-Nadeau

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lars-Alexander Kuehn

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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