Financial Risk and Unemployment

42 Pages Posted: 22 May 2019

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

David Weiss

Tel Aviv University - Eitan Berglas School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

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.

Suggested Citation

Eckstein, Zvi and Setty, Ofer and Weiss, David, Financial Risk and Unemployment (May 2019). International Economic Review, Vol. 60, Issue 2, pp. 475-516, 2019. Available at SSRN: https://ssrn.com/abstract=3391432 or http://dx.doi.org/10.1111/iere.12360

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 Setty

Tel Aviv University

Ramat Aviv
Tel-Aviv, 6997801
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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