Schumpeter (1939) proposes that recessions have virtue in promoting growth-enhancing activities. However, this view is often at odds with data, as many innovative activities appear pro-cyclical. We revisit the “virtue of bad times”theoretically and empirically. Our theory suggests that recessions have such virtue only when the cyclicality of innovation’s marginal opportunity cost dominates that...

We analyze the effects of adverse selection on worker turnover and wage dynamics in a frictional labor market. We consider a model of on-the-job search where firms offer promotion wage contracts to workers of different abilities, which is unknown to firms at the hiring stage. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers ...

Manning proposes that the ‘traditional’ monopsony model, once regarded as an analytical curiosity, be adopted as a widely-applicable description of firms’ behavior in labor markets. In Manning’s view, search frictions in the labor market generate upwardsloping labor supply curves to individual firms even when firms are small relative to the labor market. Thus a model of ‘monopsonistic competiti...

The three most recent downturns, in contrast with other post-war recessions, are characterized by slow recoveries in employment despite positive economic growth. I find that recent recoveries coincide with high uncertainty about economy-wide corporate profits at a time when output begins to rebound, a pattern that was not observed in the earlier recessions. To examine the role of uncertainty in...

A model is constructed in which trading partners are asymmetrically informed about future trading opportunties and where spatial and informational frictions limit arbitrage between markets. These frictions create an inefficiency relative to a full information equilibrium, and the extent of this inefficiency is affected by monetary policy. Under some conditions a Friedman rule is optimal, but if...

Starting a firm with expansive potential is an option for educated and high-skilled workers. This option serves as an insurance against unemployment caused by labor market frictions and hence increases the incentives for education. We show within a matching model that reducing the start-up costs for new firms results in higher take-up rates of education. It also leads, through a thick-market ex...

Starting a firm with expansive potential is an option for educated and high-skilled workers. This option serves as an insurance against unemployment caused by labor market frictions and hence increases the incentives for education. We show within a matching model that reducing the start-up costs for new firms results in higher take-up rates of education. It also leads, through a thick-market ex...

I revisit the Great Inflation and the Great Moderation for nominal and real variables. I document a dichotomy in the evolution of the cyclical volatility of financial variables since the mid-1980s. While financial price variables are smoother during the Great Moderation, financial quantity measures experience an immoderation. A model with financial frictions and financial shocks allowing for st...