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Can the Stochastic Discount Factor Explain Unemployment Fluctuations?

Author

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  • Bingsong Wang

    (Department of Economics, University of Sheffield, UK)

Abstract

Recent developments in Macro-labor show that discount rates may play an important role in unemployment fluctuations. This paper examines this hypothesis by using a standard search model of equilibrium unemployment with the canonical consumption-based stochastic discount factor. When the discount rate is inferred from data on real consumption in the U.S., little fluctuations in unemployment are generated from the model. Moreover, a counterfactual positive correlation between consumption growth and unemployment emerges from the model. This contradicts the post-war U.S. data. Those results hold even if the model contains habit formation in consumption and the wage is assumed to be invariant to discounts. The paper also studies the role of other factors in amplifying the impact of the discount rate shock, including endogenous job separation, variations in firms’ profit per worker and the risk premium.

Suggested Citation

  • Bingsong Wang, 2022. "Can the Stochastic Discount Factor Explain Unemployment Fluctuations?," Working Papers 2022006, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2022006
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    File URL: https://www.sheffield.ac.uk/economics/research/serps
    File Function: First version, April 2022
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    More about this item

    Keywords

    search frictions; discount rates; unemployment fluctuations;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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