Subject Area

Economics

Abstract

This dissertation comprises three chapters, with the first two focusing on the labor market and the third examining the impact of uncertainty on asset prices. These topics are highly relevant to current literature and have significant policy implications.

The primary purpose of the first two chapters is to address the Shimer puzzle, which suggests that technology shocks cannot account for the high variations observed in the labor market. Understanding the underlying sources that can explain this puzzle is crucial as it helps us comprehend factors affecting job creation and the unemployment rate. Moreover, labor market fluctuations play a vital role in predicting business cycles and evaluating interest rates.

Labor market conditions have been emphasized in recent economic policy discussions. They are a key consideration during the process of raising interest rates in 2021 and have been mentioned in every Federal Open Market Committee (FOMC) meeting and public speech since the beginning of 2024 by Federal Reserve Chairman Jerome Powell. Beyond the impact of labor market conditions on monetary policy, research on the labor market also provides insights into other government policies, such as those related to wage rigidities, unemployment benefits, or mismatches between firms and the unemployed.

Given the importance of labor market research and the limitations of previous studies, Chapter One examines the impact of the discount factor in the labor market. We emphasize that this factor can influence both households' decisions and firms' hiring decisions. In Chapter Two, considering that business formation is one of the major driving forces of aggregate fluctuations and that credit constraints limit firms' borrowing capacity to hire, we integrate these two aspects into one real business cycle model. Furthermore, the third chapter is closely related to the preceding two chapters, as variations in the labor market are also a source of uncertainty and both the labor market and asset prices are influenced by monetary policies and business cycles.

In the first chapter, we explore the determinants of co-movements in the labor market and the stock market, moving beyond previous literature focusing on technology shocks. We develop a real business cycle model incorporating labor market frictions. We also employ the Epstein-Zin utility function and convex adjustment costs for capital, standard in the asset pricing literature, to better capture the role of the discount factor. Additional considerations include unemployment benefits and matching efficiency, as well as government spending. To examine the impact of wage rigidities, we compare Nash bargaining and alternative offer bargaining mechanisms. We also examine different ratios of unemployment benefits to wages to address the lack of consensus in the existing literature. Using Bayesian estimation, we quantify the contributions of each source to the variations in the labor market and the stock market. The findings indicate that unemployment benefits are the primary driver of labor market fluctuations, while the discount factor explains most variations in the price-dividend ratio. Our findings also reveal that the impact of these shocks varies depending on the presence of wage rigidities and the ratio of unemployment benefits to wages.

In the second chapter, we integrate credit constraints and firm dynamics into a real business cycle model to explore how these two frictions explain labor market fluctuations. By considering the direct impact of credit constraints on job creation as well as the direct effects of firm dynamics on both job creation and destruction, our study addresses research gaps that have previously focused on analyzing these frictions in isolation. We utilize the enforcement constraint to model credit frictions, while the endogenous number of firms depends on the number of varieties produced. We find that productivity shocks are amplified due to credit frictions and firm dynamics.

In the third chapter, we examine the impact of uncertainty on asset prices using the macroeconomic uncertainty index as a proxy. However, previous literature has focused on investigating these effects in the structural vector autoregressive (VAR) model. Utilizing a structural VAR model to analyze the effects of the uncertainty index is inadequate due to its inability to capture nonlinearity and time-varying variance in the uncertainty index. To address this gap in the literature, we employ a time-varying VAR model with stochastic volatility to determine whether the impacts of uncertainty shocks differ across business cycles and exhibit asymmetric impacts. The findings show adverse effects of uncertainty shocks in both models, with varying magnitudes of rebound and overshoot across different business cycles. Furthermore, the findings do not provide evidence of the asymmetric effects of uncertainty shocks.

Degree Date

Summer 8-6-2024

Document Type

Dissertation

Degree Name

Ph.D.

Department

Economics

Advisor

Nathan Balke

Second Advisor

Michael Sposi

Third Advisor

Rocio Madera

Fourth Advisor

Enrique Martínez-García

Number of Pages

133

Format

.pdf

Creative Commons License

Creative Commons Attribution-Noncommercial 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial 4.0 License

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