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Authors: Ding, Xiang
Advisors: Kiyotaki, Nobuhiro
Department: Economics
Class Year: 2013
Abstract: Why does US unemployment continue to be high more than three years after the financial crisis? This paper argues that frictions in labor and credit markets together with heightened uncertainty prevent firms from creating many jobs. Estimated multivariate SVARs reveal that aggregate firm-related variables - vacancies and layoffs - respond significantly to shocks in the corporate credit spread and stock index uncertainty. Panel data shows that credit constraints lower employment levels through firms' short as well as long-term debt structures. The negative credit effect is stronger for debt-heavier firms and more visible during recessions. Firms also reduce employment in the face of higher idiosyncratic volatility in sales growth across all periods and sizes. To quantify these observations, the paper develops an extension of the search-and-matching model with heterogenous firms, time-varying credit frictions, and uncertainty shocks. A crucial feature of the model is an unemployment accelerator led by the co-determination in credit and uncertainty. Conservative calibrations of credit and uncertainty are enough to amplify and prolong deviations in the unemployment rate. The extension outperforms the standard search-and- matching model by capturing greater unemployment volatility as well as accounting for more than one-third of the unemployment gap since 2010.
Extent: 115 pages
Access Restrictions: Walk-in Access. This thesis can only be viewed on computer terminals at the Mudd Manuscript Library.
Type of Material: Princeton University Senior Theses
Language: en_US
Appears in Collections:Economics, 1927-2017

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