The unemployment-risk channel in business cycle fluctuations

Source: VoxEU CEPR

Early signs of a recession can lead to a negative feedback loop, with workers’ concerns about unemployment dampening demand and thus deepening the recession. This column uses a heterogeneous agent model to quantify the importance of the ‘unemployment-risk’ channel for business cycle fluctuations in the US economy. It shows that the channel accounts for around one-third of observed unemployment fluctuations. As the demand amplification through precautionary savings is inefficient, this finding provides an additional rationale for stabilisation policies by policymakers. 

Figure: Estimated response of unemployment to monetary policy and total factor productivity (TFP) shocks

Source: The unemployment-risk channel in business cycle fluctuations. 2022. Vox EU CEPR

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Posted by at 11:08 AM

Labels: Inclusive Growth, Macro Demystified


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