Abstract: Jobs become more precarious in recessions, while risk premia tend to rise. This paper links these two empirical regularities in a consumption-based asset pricing model with imperfectly insurable job loss risk, and shows that this offers a unified explanation for several asset pricing and macroeconomic phenomena including the equity premium, risk-free rate, and unemployment volatility puzzles. Since job loss leads to a large idiosyncratic consumption decline, agents become less willing to bear risk when jobs become more insecure. Consequently, extrinsic risk aversion increases endogenously when job insecurity rises, generating high, countercyclical risk premia. Consistent with this mechanism, the job loss rate is shown to be a robust forecaster of future excess returns.  The model's equity premium Euler equation can be estimated directly, producing a value of 12 for the risk aversion parameter versus estimates for the standard CCAPM which exceed 100. The precautionary saving motive spurred by job loss risk means that the risk-free rate puzzle is avoided, and the model explains the cross-section of returns more effectively than several other consumption-based models. Embedding the mechanism into a macroeconomic model with endogenous unemployment risk allows for a resolution of the unemployment volatility puzzle due to a novel feedback loop between job loss risk, risk premia, and the hiring decision of firms.

Abstract: This paper develops a theory of how TFP news shocks can impact the economy via a Keynesian supply channel. With frictional labour markets, bad TFP news reduces firms' incentive to post vacancies, worsening households' employment prospects. Households respond by accumulating liquid assets and cutting spending for precautionary reasons, triggering a recession that compounds the labour market downturn. This mechanism is outlined analytically and numerically in a heterogeneous agent New Keynesian model, with supporting local projection evidence. The combination of labour market frictions and precautionary saving is necessary to match the joint output and nominal interest rate dynamics observed empirically following a news shock. In contrast to previous theories, the transmission mechanism leaves room for policy to mitigate the shock's contractionary effects.

With Paul Beaudry and Franck Portier 

Abstract: The way monetary policy is conducted is a key element in New Keynesian models, and crucially determines allocations properties. We show that assuming monetary authorities follow a Taylor rule may bias estimation of New Keynesian type models for two reasons. The first one is theoretically trivial, and is a standard misspecification bias that occurs if the actual conduct of policy does not follow the model specified Taylor rule. The second one is more subtle, and we refer to it as a determinacy bias. It occurs when wrongly assuming a Taylor rule restricts the set of admissible model deep parameters when one requires the equilibrium to be determinate, as is almost always the case in the applied literature. Using US data, we show that the determinacy bias is a serious problem in small scale New Keynesian models, as the slope of Phillips curve is biased upwards. The misspecification bias is a serious problem when estimating a medium-scale model, as it affects the contribution of the various shocks to macroeconomic fluctuations. We propose an alternative agnostic specification of the policy rule that is immune to both misspecification and determinacy biases.

With Nikolas Kuhlen

Abstract:  We develop a quantitative measure of one economically relevant dimension of news coverage: the degree of news concentration. Intuitively, news coverage is likely to become highly concentrated around particularly newsworthy events, meaning it potentially conveys information about the economy's latent state variables. We observe that news concentration does indeed exhibit clear spikes around important economic, financial, and political events, and find that these increases are associated with two key features: an immediate rise in uncertainty, consistent with theory, and a future macroeconomic contraction. These increases are not found to be driven by a range of typical macroeconomic shocks. The variable is a robust forecaster of recessions and is priced in the cross-section of returns. We rationalise the latter result through an ICAPM framework by showing that innovations in news concentration represent volatility news.