- American Economic Review (Forthcoming)
Market economies are intrinsically unstable. The standard search
model of equilibrium unemployment, once solved accurately with a
globally nonlinear algorithm, gives rise endogenously to rare disasters.
Intuitively, in the presence of cumulatively large negative
shocks, inertial wages remain relatively high, and reduce profits.
The marginal costs of hiring run into downward rigidity, which
stems from the trading externality of the matching process, and
fail to decline relative to profits. Inertial wages and rigid hiring
costs combine to stifle job creation flows, depressing the economy
into disasters. The disaster dynamics are robust to extensions to
home production, capital accumulation, and recursive utility.
Forthcoming Article Downloads