Nicolas Petrosky-Nadeau

Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions

This paper shows that goods-market frictions drastically change the dynamics of the labor market, bridging the gap with the data both in terms of persistence and volatility. In a DSGE model with three imperfect markets – goods, labor and credit – we find that credit- and goods-market imperfections are substitutable in raising volatility. Goods-market frictions are however unique in generating persistence. The two key mechanisms generating autocorrelation in growth rates and the hump-shaped pattern in the response to productivity shocks are related to the goods market: i) countercyclical dynamics of goods market tightness and prices, which alter future profit flows and raise persistence and ii) procyclical search effort in the goods market, by either consumers, firms or both, raises both amplification and persistence. Expanding our knowledge of goods market frictions is thus needed for a full account of labor market dynamics.

Financial Frictions, the Housing Market, and Unemployment

We develop a two-sector search-matching model of the labor market with imperfect mobility of workers, augmented to incorporate a housing market and a frictional goods market. Homeowners use home equity as collateral to finance idiosyncratic consumption opportunities. A financial innovation that raises the acceptability of homes as collateral raises house prices and reduces unemployment. It also triggers a reallocation of workers, with the direction of the change depending on firms market power in the goods market. A calibrated version of the model under adaptive learning can account for house prices, sectoral labor flows, and unemployment rate changes over 1996–2010.We develop and calibrate a two-sector, search-matching model of the labor market augmented to incorporate a housing market and a frictional goods market. The labor market is divided into a construction sector and a non-housing sector, and there is perfect mobility of unemployed workers across sectors. In the frictional goods market households, who lack commitment, x85nance random consumption opportunities with home equity loans. The model can generate multiple steady-state equilibria across which housing prices are negatively correlated with unemployment. Relaxing lending standards typically reduces unemployment, but it can have non-monotonic e¤ects on housing prices and supply. It also leads to a reallocation of workers across sectors, the direction of which depends on x85rmsx92market power in the goods market. Quantitatively, we x85nd that innovations that generate an increase in home equity-based borrowing of the same magnitude as the one observed during the 90x92s explain a reduction in the steady-state unemployment rate between 1/2 and 1 percentage point depending on the calibration strategy. JEL Classix85cation: D82, D83, E40, E50 Keywords: credit, unemployment, housing, limited commitment, liquidity. This paper has benex85tted from useful discussions with Aleksander Berentsen and Murat Tasci. We also thank for their comments seminar participants at the Bank of Canada, at the universities of Basel, Bern, California at Irvine, and Hawaii at Manoa.

Endogenous Disasters and Asset Prices

Frictions in the labor market are important for understanding the equity premium in the financial market. We embed the Diamond-Mortensen-Pissarides search framework into a dynamic stochastic general equilibrium model with recursive preferences. The model produces realistic equity premium and stock market volatility, as well as a low and stable interest rate. The equity premium is countercyclical, and forecastable with labor market tightness, a pattern we confirm in the data. Intriguingly, three key ingredients (small profits, large job flows, and matching frictions) in the model combine to give rise endogenously to rare disasters a la Rietz (1988) and Barro (2006).

Solving the Dmp Model Accurately

An accurate global algorithm is critical for quantifying the dynamics of the Diamond-Mortensen-Pissarides model. Loglinearization understates the mean and volatility of unemployment, overstates the unemployment-vacancy correlation, and ignores impulse responses that are an order of magnitude larger in recessions than in booms. Although improving on loglinearization, the second-order perturbation in logs also induces large errors. We demonstrate these insights in the context of Hagedorn and Manovskii (2008). Once solved accurately, their small surplus calibration fails to explain the Shimer (2005) puzzle. While the volatility of labor market tightness is close to the data, the unemployment volatility is too high.

Solving the Diamond–Mortensen–Pissarides model accurately

An accurate global projection algorithm is critical for quantifying the basic moments of the Diamond–Mortensen–Pissarides model. Log linearization understates the mean and volatility of unemployment, but overstates the volatility of labor market tightness and the magnitude of the unemployment–vacancy correlation. Log linearization also understates the impulse responses in unemployment in recessions, but overstates the responses in the market tightness in booms. Finally, the second‐order perturbation in logs can induce severe Euler equation errors, which are often much larger than those from log linearization.nnSearch frictions unemployment projection perturbation nonlinear dynamics parameterized expectations finite elements E24 E32 J63 J64

Efficiency in Sequential Labor and Goods Markets

This paper studies the optimal sharing of value added between consumers, producers, and labor. We first define a constrained optimum. We then compare it with the decentralized allocation. They coincide when the price maximizes the expected marginal revenue of the firm in the goods market, an outcome of the competitive search equilibrium, and when the wage exactly offsets the congestion externality of firm entry in the labor market, which is the traditional Hosios condition. Under price and wage bargaining, this allocation is achieved under a double Hosios condition combining the logic of competitive search and Hosios efficiency. The consumer receives a share of the goodsmarket trading surplus equal to the amount of externality occasioned by its search activity and the worker receives a share of the labor match surplus to offset the externality of firm entry in the matching process. A calibration of the model to the US economy indicates that the labor market is near efficient, and free-entry of consumers leads to excess excess consumer market power in setting prices. Restoring efficiency leads to a modest change in welfare.

Disentangling goods, labor and credit market frictions in three European economies

We build a flexible model with search frictions in three markets: credit, labor, and goods markets. We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and an economy with structural rigidities (Spain). In these three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of the total entry costs. In the goods market, adverse supply shocks are amplified through their propagation to the demand side, as they also imply income losses for consumers. This adds up to, at most, an additional 15% to 25% to the impact of the shocks. Finally, the speed of matching in the goods market and the credit market accounts for a small fraction of unemployment: most variation in unemployment comes from the speed of matching in the labor market.