High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations

35 Pages Posted: 10 Sep 2021 Last revised: 9 May 2022

See all articles by Indrajit Mitra

Indrajit Mitra

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Taeuk Seo

University of Michigan, Stephen M. Ross School of Business

Yu Xu

University of Delaware

Date Written: May 6, 2022

Abstract

We establish an observational equivalence between the unemployment fluctuations of two economies: the Diamond-Mortensen-Pissarides (DMP) search economy augmented to feature time-varying risk premia, and an otherwise identical economy without risk premia but with a time-varying value of leisure. This equivalence allows us to view the effects of different models of risk premia as operating through a single channel---one that alters the value of leisure in the familiar setting of the DMP model. We use the equivalence to derive simple expressions for the semi-elasticities of labor market tightness with respect to productivity and risk premium shocks.

Keywords: Equivalence result, fundamental surplus, unemployment fluctuations, time-varying risk premia

JEL Classification: E24, E32, E44, G10, J23, J63

Suggested Citation

Mitra, Indrajit and Seo, Taeuk and Xu, Yu, High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations (May 6, 2022). Available at SSRN: https://ssrn.com/abstract=3918535 or http://dx.doi.org/10.2139/ssrn.3918535

Indrajit Mitra

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Taeuk Seo

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Yu Xu (Contact Author)

University of Delaware ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

HOME PAGE: http://https://www.yuxufinance.net/

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