Frictional unemployment with stochastic bubbles

Guillaume Vuillemey; Etienne Wasmer

doi:10.1016/j.euroecorev.2019.103352

Frictional unemployment with stochastic bubbles

Guillaume Vuillemey, Etienne Wasmer

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

We show that the volatility puzzle in labor economics (Shimer, 2005) stems from the inability of technology shocks to generate sufficient volatility of firm value. We introduce non-fundamental shocks to firm value, akin to bubbles, into an otherwise standard search-and-matching model. When calibrated to stock market data, stochastic bubbles significantly improve the ability of the matching model to quantitatively explain the volatility of the US labor market. An extension with multiple sectors improves the persistence of simulated labor market variables.

Original language	English (US)
Article number	103352
Journal	European Economic Review
Volume	122
DOIs	https://doi.org/10.1016/j.euroecorev.2019.103352
State	Published - Feb 2020

Keywords

Bubbles
Labor frictions
Unemployment volatility

ASJC Scopus subject areas

Finance
Economics and Econometrics

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