Ambiguity and Unemployment Fluctuations

39 Pages Posted: 16 Mar 2022

See all articles by Indrajit Mitra

Indrajit Mitra

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Yu Xu

University of Delaware

Date Written: March 2, 2022

Abstract

We analyze the consequences of ambiguity aversion in the Diamond-Mortensen-Pissarides (DMP) search and matching model. Our model features a cross-section of workers whose productivity is the sum of an aggregate and a match-specific component. Firms are ambiguity averse towards match-specific productivity. Our model delivers two insights. First, we show that ambiguity aversion substantially amplifies unemployment rate volatility. Second, we show that a part of the high value of leisure required by the canonical DMP model to generate realistic unemployment rate volatility can arise from fitting a model missing ambiguity aversion to data generated in an environment where agents are ambiguity averse.

Keywords: Ambiguity, model uncertainty, robustness, unemployment, labor search.

JEL Classification: D81, E24, E32, J63, J64

Suggested Citation

Mitra, Indrajit and Xu, Yu, Ambiguity and Unemployment Fluctuations (March 2, 2022). Available at SSRN: https://ssrn.com/abstract=4048413 or http://dx.doi.org/10.2139/ssrn.4048413

Indrajit Mitra

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

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