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

31 Pages Posted: 10 Sep 2021

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: September 6, 2021

Abstract

Ljungqvist and Sargent (2017) (LS) show that unemployment fluctuations can be understood in terms of a quantity they call the "fundamental surplus". However, their analysis ignores risk premia, a force that Hall (2017) shows is important in understanding unemployment fluctuations. We show how the LS framework can be adapted to incorporate risk premia. We derive an equivalence result which relates parameters in economies with risk premia to those of an artificial economy without risk premia. We show how to use properties of the artificial economy to deduce how risk premia impact unemployment dynamics in the original economy.

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 (September 6, 2021). 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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