Job Ladder and Business Cycles [link]
I study the aggregate implications of job-to-job flows in a Heterogeneous Agents New Keynesian model. Labor markets are subject to search frictions, and job matches are (ex-post) heterogeneous in productivity. Workers search on-the-job and cannot directly insure against the earnings risk stemming from climbing and falling off the ladder. The state of the economy depends on the distribution of workers over match productivity, earnings, and wealth. The job ladder is shown to have both supply and demand-side consequences over the business cycle: the employment reallocation over the ladder moves labor productivity in response to aggregate shocks, while workers’ consumption reacts to changes in labor market flows. In response to an adverse financial shock, reallocation over the job ladder slows down, keeping workers stuck at low-productivity jobs. Aggregate labor productivity falls with time, which drags down consumption and output even further. These patterns match the behavior of aggregates during and after the Great Recession, with the fall in labor productivity explaining both the slow recovery and the missing disinflation.
A Further Look at the Propagation of Monetary Policy Shocks in HANK [link]
(with Greg Kaplan, Benjamin Moll and Giovanni Violante) R&R on JMCB
We provide quantitative guidance on the relative importance of Heterogeneous Agent New Keynesian (HANK) model elements for amplification or dampening of the response of aggregate consumption to a monetary shock. We emphasize four findings. First, the presence of capital adjustment costs does not affect the aggregate response, but does change the transmission mechanism so that a larger share of indirect effects originates from equity prices rather than from labor income. Second, incorporating estimated unequal incidence functions for aggregate labor income fluctuations leads to either amplification or dampening, depending on the data and estimation methods. Third, distribution rules for monopoly profits that allocate a larger share to liquid assets lead to greater amplification. Fourth, assumptions about the fiscal reaction to a monetary policy shock have a stronger effect on the aggregate consumption response than any of the other three elements.