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Discounts, Rationing, and Unemployment

Clymo, Alex (2019) 'Discounts, Rationing, and Unemployment.' European Economic Review. ISSN 0014-2921 (In Press)

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Abstract

How are changes in discount rates transmitted to unemployment, and are they a quantitatively relevant driver of the Great Recession? In this paper I answer these questions in a search and matching model featuring endogenous capital accumulation. Rising discount rates have a direct effect on unemployment, since hiring is an investment activity for firms in the presence of search frictions, and an indirect effect, since a rise in discounts reduces investment in capital, reducing the marginal product of labour and hence incentives to hire. I estimate changes in discount rates during the Great Recession using data on both stock markets and investment. Discounts measured from the stock market increase by more but recover faster, while discounts for capital investment increase by less but more persistently. Combined, the two discount measures can account for 52% of the peak rise in unemployment during the Great Recession. Finally, while capital discounts affect unemployment by changing labour productivity, their importance cannot be inferred from observed movements in labour productivity alone, and capital discounts raised unemployment even while observed labour productivity was rising.

Item Type: Article
Additional Information: Accepted with minor revisions
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Elements
Date Deposited: 16 Jan 2019 16:17
Last Modified: 10 Dec 2019 16:15
URI: http://repository.essex.ac.uk/id/eprint/21172

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