Financial Risk and Unemployment

34 Pages Posted: 19 May 2015

See all articles by Zvi Eckstein

Zvi Eckstein

The Interdisciplinary Center (IDC); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Ofer Setty

Tel Aviv University - Eitan Berglas School of Economics

David Weiss

Tel Aviv University - Eitan Berglas School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2015

Abstract

There is a strong correlation between the corporate interest rate (BAA rated), and its spread relative to Treasuries, and the unemployment rate. We model how interest rates and potential default rates impact equilibrium unemployment in a Diamond-Mortesen-Pissarides model. We calibrate the model using US data without targeting business cycle statistics. Volatility in the corporate interest rate can explain about 80% of the volatility of unemployment, vacancies, and market tightness. Simulating the Great Recession shows the model can account for much of the rise in unemployment. Without Fed action, unemployment would have been 6% higher.

Keywords: business cycles, corporate interest rates, equilibrium unemployment, Great Recession, interest rate spread, search and matching models

JEL Classification: E22, E24, E32, E44, J41, J63, J64

Suggested Citation

Eckstein, Zvi and Setty, Ofer Adi and Weiss, David, Financial Risk and Unemployment (May 2015). CEPR Discussion Paper No. DP10596. Available at SSRN: https://ssrn.com/abstract=2608054

Zvi Eckstein (Contact Author)

The Interdisciplinary Center (IDC) ( email )

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HOME PAGE: http://www1.idc.ac.il/Faculty/Eckstein/index.html

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ofer Adi Setty

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

David Weiss

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

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