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Events of Department of Economics

April 4, 2019 at 12:30
Seminar Room 5.e4.sr04 - Via Roentgen 1

Seminar (Joint with the BAFFI CAREFIN)


Labor Income Risk, Asset Prices and Unemployment Cyclicality

Pontus Rendahl (University of Cambridge) Abstract

This paper develops a framework of the macroeconomy in which labor income risk induces a precautionary demand for liquidity. As a consequence, any aggregate shock to the economy which increases income risk reduces the demand for illiquid assets, such as firm ownership. This aversion towards illiquidity materializes as endogenous fluctuations in the stochastic discount factor of firm profits, which in turn affects equity prices and job-creation. The resulting mechanism generates realistic levels of volatility in unemployment and asset prices without relying on large gyrations in firm profits/dividends, sticky wages or prices, nor on an excessively large aversion towards risk. In addition, the framework provides a rationale for unemployment insurance as an automatic stabilizer