INDRAJIT MITRA

• My Google Scholar

• My web page at the Federal Reserve Bank of Atlanta

• Contact: indrajit.mitra@atl.frb.org

Published Papers

• Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method

 The Review of Financial Studies 38 (8), 2227-2274  (with Leonid Kogan)  Editor's Choice article.

Abstract: We propose a simulation-based procedure for evaluating approximation accuracy of numerical solutions of general equilibrium models with heterogeneous agents. We measure the approximation accuracy by the magnitude of the welfare loss suffered by agents from following sub-optimal policies. Our procedure allows agents to have knowledge of the future paths of the economy under suitably imposed costs of foresight. This method is general, straightforward to implement, and can be used in conjunction with various solution algorithms. We illustrate our method in two contexts: the incomplete-markets model of Krusell and Smith (1998) and the heterogeneous firm model of Khan and Thomas (2008). 

• A Theory of the Term Structure of Interest Rates under Limited  Household Risk Sharing

 The Review of Financial Studies 37 (8), 2461-2509 (with Yu Xu). 

Abstract:  We present a theory in which the interaction between limited sharing of idiosyncratic labor income risk and labor adjustment costs (that endogenously arise through search frictions) determines interest rate dynamics. In the general equilibrium, the interaction of these two ingredients relates bond risk premia, cross-sectional skewness of income growth, and labor market tightness. Our model rationalizes an upward sloping average yield curve and makes two predictions: (1) a flatter real yield curve in economies with lower job-finding rates, and (2) a negative relation between labor market tightness and bond risk premia. We provide evidence for our theory's mechanism and predictions.

• High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations

Management Science 70 (6), 3381-4165  (with Taeuk Seo and Yu Xu).

Abstract:  We establish an observational equivalence between unemployment fluctuations of the Diamond-Mortensen-Pissarides search economy augmented with time-varying risk premia, and an otherwise identical economy without risk-premia but with a time-varying value of leisure. This equivalence holds for general risk-premia processes and allows us to view the effects of different models of risk-premia as operating through a single channel—one that alters the value of leisure. We derive simple expressions for semi-elasticities of labor market tightness with respect to productivity and risk premium shocks. We show wages can be used to detect misspecification in the discount rate process used in hiring decisions. 

• Time-Varying Risk Premium and Unemployment Risk across Age Groups

The Review of Financial Studies 33 (8), 3624-3673 (with Yu Xu)  

Abstract: We show that time-varying risk premium in financial markets can explain a key yet puzzling feature of labor markets: the large differences in unemployment risk faced by workers of different ages over the business cycle. Our search model features a time-varying risk premium and learning about unobserved heterogeneity in worker productivity. The interaction of these two features has large real effects through firms' labor policies. Our model predicts the unemployment risk of young workers relative to prime-age workers to be more sensitive to productivity shocks (a) when market risk premium is high, and (b) in high beta industries. We find empirical support for these predictions. 

Working Papers

• Firm-level Input Price Changes and Their Effects: A Deep Learning Approach

(with  Sudheer Chava, Wendi Du, Agam Shah, and Linghang Zeng)  

Abstract:  We develop firm-level measures of input and output price changes based on textual analysis of earnings calls. Our measures establish five facts: (1) The median firm experiences an increase (decrease) in input prices every 7 (30) months. (2) Input price changes are driven by aggregate and firm specific components. Each component contributes equally. (3) Firms passthrough input price changes to output prices in the same quarter with 72% probability. The pass through magnitude is 0.69. (4) Our input price change measure predicts future changes in COGS. (5) Firm stock price reaction is negatively related to our input price change measure. 

• The Fed Information Effect and Firm-level Investment: Evidence and Theory

(with  Alex Hsu, Yu Xu, and Linghang Zeng)  Slides 

Abstract:  We provide firm-level evidence that the Federal Reserve’s economic outlook expressed during FOMC announcements has real effects. Using a high frequency measure of Fed information, we show that analyst forecast revisions to Fed information are larger for more cyclical firms. We construct a heterogeneous firm New Keynesian model incorporating this finding to analyze Fed information’s effect on investment. Our model predicts greater sensitivity of firm profitability and investment to Fed information for more cyclical firms. We find evidence for both predictions. At the aggregate level, our model provides an explanation for inflation’s slow decline in 2022-2023 despite aggressive rate hikes.

• A Quantitative Comparison of Unemployment Benefit Extension and Level Increase

(with  Erhan Bayraktar and Jingjie Zhang)

Abstract:  We use mean-field game theory to quantitatively compare two unemployment insurance (UI) extension policies commonly used during recessions: raising benefit levels versus extending the duration of benefits. Our heterogenous-agent model features costly job search and individual savings. Our calibrated model matches the savings distribution observed in the U.S. After requiring that the two UI policies have the same cost, we find: (1) a large, one-time lumpsum payment results in lower unemployment rates relative to a moderate, long-lived increase in benefits and (2) both policies deliver approximately the same ex-ante expected utility to unemployed individuals. 

• Ambiguity and Unemployment Fluctuations

(with  Yu Xu)

Abstract:  We analyze the consequences of ambiguity aversion in the Diamond-Mortensen-Pissarides (DMP) search and matching model. Our model features a cross-section of workers whose productivity is the sum of an aggregate and a match-specific component. Firms are ambiguity averse towards match-specific productivity. Our model delivers two insights. First, we show that ambiguity aversion substantially amplifies unemployment rate volatility. Second, we show that a part of the high value of leisure required by the canonical DMP model to generate realistic unemployment rate volatility can arise from fitting a model missing ambiguity aversion to data generated in an environment where agents are ambiguity averse. 

• Moral Hazard and Firm Age: A General Equilibrium Analysis

Abstract: Young firms respond more strongly to changing investment opportunities than mature firms. I provide a financial friction-based explanation of this phenomenon and quantify the general equilibrium implications of this heterogeneity. In my model, a representative investor finances firms with optimal long-term contracts derived from a moral hazard problem. I analyze how these contracts respond to an aggregate uncertainty shock. My model predicts: (1) a higher investment rate sensitivity to this shock for younger firms. I provide evidence of this prediction. (2) A large uncertainty shock prolongs recovery of aggregate quantities substantially. This provides a potential resolution to the slow recovery puzzle in the literature.