Unemployment (fears) and Deflationary Spirals

By W. J. D. Haan, Pontus Rendahl, M. Riegler. 2015

116 citations recorded by the source corpus.

The interaction of incomplete markets and sticky nominal wages is shown to magnify business cycles even though these two features – in isolation – dampen them. During recessions, fears of unemployment stir up precautionary sentiments which induces agents to save more. The additional savings may be used as investments in both a productive asset (equity) and an unproductive asset (money). But even a small rise in money demand has important consequences. The desire to hold money puts deflationary pressure on the economy, which, provided that nominal wages are sticky, increases wage costs and reduces firm profits. Lower profits repress the desire to save in equity, which increases (the fear of) unemployment, and so on. This is a powerful mechanism which causes the model to behave differently from both its complete markets version, and a version with incomplete markets but without aggregate uncertainty. In contrast to previous results in the literature, agents uniformly prefer non-trivial levels of unemployment insurance.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/55505b6d0ea10d1416efbba5617d2fcfb5bd1bf0

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Citations in the corpus

Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy (2016, background): “Non-linearities are also central in den Haan et al. (2015), who entertain a heterogeneous-agent economy with labor-market search and matching frictions and money.”
Microeconomic Heterogeneity and Macroeconomic Shocks (2018, unknown): “Den Haan et al. (2017) and Bayer et al. (2017) argue that the precautionary saving response to an increase in labor market risk causes households to substitute away from consumption expenditures into nonproductive, safe assets (such as government bonds), which can trigger a demand-driven recession.”
The Fiscal Multiplier (2019, unknown): “…Kaplan et al. (2016), Auclert (2016) and L¨utticke (2015), McKay and Reis (2016), McKay et al. (2015), Bayer et al. (2015), Ravn and Sterk (2013) and Den Haan et al. (2015), but we are not aware of any contribution in this literature which considers ﬁscal multipliers. tion aﬀect private…”
Transmission of Monetary Policy with Heterogeneity in Household Portfolios (2018, unknown): “When the economy is demand-driven, the Fisher channel amplifies the aggregate effects of monetary shocks through heterogeneity in propensities to consume by 9%. When prices are flexible, in contrast, the Fisher channel leads to a boom in investment through redistributing to high MPI households. This”
Inequality and Aggregate Demand (2016, background): “Other authors such as den Hann et al. (2015) microfound this γ function with a search and matching model of the labor market; we sidestep this complication while preserving the core insight of their mechanism by directly parametrizing γ directly.”
Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk (2019, background): “The focus on idiosyncratic income risk and the response of precautionary savings links our paper to the burgeoning literature on heterogeneous agent New Keynesian models, in particular to Ravn and Sterk (2017) and Den Haan, Rendahl, and Riegler (2017).”