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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

Click here to read the full article.

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. 

Read the full article…

Posted by at 11:08 AM

Labels: Inclusive Growth, Macro Demystified

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