Abstract
The recent financial crisis has been associated with a significant rise in the unemployment rate in the U.S. To understand the impact of financial frictions and shocks on unemployment fluctuations, I develop a monetary DSGE model with explicit financial and labor market frictions. The model is estimated using U.S. data over the period of 1984Q1 to 2016Q4. I find that the model accounts well for the cyclical behavior of unemployment and vacancies observed in the data. The historical decomposition results show that financial wealth shocks contribute significantly to the rise in the unemployment rate following the recent financial crisis. Overall, I find that financial wealth shocks contribute more than 30 per cent of the fluctuations in unemployment and vacancies in the U.S. during the sample period.
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