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

53 Pages Posted: 10 Sep 2021 Last revised: 28 Oct 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: October 26, 2022

Abstract

We establish an observational equivalence between unemployment fluctuations of two economies: the Diamond-Mortensen-Pissarides (DMP) search economy augmented with time-varying risk-premia, and an otherwise identical economy without risk-premia but with a time-varying value of leisure. This equivalence holds for general specifications of risk-premia process and also with heterogeneity in worker productivity. The 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 benchmark DMP model. We 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, heterogeneity

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 (October 26, 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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