Working Paper: CEPR ID: DP10596
Authors: Zvi Eckstein; Ofer Setty; David Weiss
Abstract: There is a strong correlation between the corporate interest rate (BAA rated), and its spread relative to Treasuries, and the unemployment rate. We model how interest rates and potential default rates impact equilibrium unemployment in a Diamond-Mortesen-Pissarides model. We calibrate the model using US data without targeting business cycle statistics. Volatility in the corporate interest rate can explain about 80% of the volatility of unemployment, vacancies, and market tightness. Simulating the Great Recession shows the model can account for much of the rise in unemployment. Without Fed action, unemployment would have been 6% higher.
Keywords: business cycles; corporate interest rates; equilibrium unemployment; great recession; interest rate spread; search and matching models
JEL Codes: E22; E24; E32; E44; J41; J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| BAA corporate interest rates (E43) | profits per worker (D33) |
| profits per worker (D33) | vacancies posted (J63) |
| vacancies posted (J63) | unemployment (J64) |
| higher interest rates (E43) | costs associated with posting vacancies (J68) |
| costs associated with posting vacancies (J68) | unemployment (J64) |
| bankruptcy rates (K35) | future profits expectations (G17) |
| future profits expectations (G17) | vacancies posted (J63) |