Revisiting the Hypothesis of High Discounts and High Unemployment

Paolo Martellini, Guido Menzio, Ludo Visschers

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We revisit the hypothesis that cyclical fluctuations in unemployment are caused by shocks to the discount rate. We use a simple but rich search-theoretic model of the labour market in which the UE, EU and EE rates are all endogenous. Analytically, we show that an increase in the discount rate lowers the UE rate and, under some natural conditions, it lowers the EU rate. Quantitatively, we show that an increase in the discount rate from 4% to 10% generates a 3.5% decline in the UE rate and a 6% decline in the EU rate. These findings are at odds with the actual behaviour of the US labour market over the business cycle, which features a negative comovement between the UE and EU rates.

    Original languageEnglish (US)
    Pages (from-to)2203-2232
    Number of pages30
    JournalEconomic Journal
    Volume131
    Issue number637
    DOIs
    StatePublished - Jul 1 2021

    ASJC Scopus subject areas

    • Economics and Econometrics

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