Essays on Unemployment Risk, Business Cycles, and Monetary Policy

This thesis consists of three chapters, studying the aggregate business cycle implications of incomplete markets in the form of uninsured unemployment risk. The first chapter studies the conduct of monetary policy in presence of heterogeneous exposure to energy price shocks between the employed and the unemployed, as it is documented by data from the euro area Consumer Expectation Survey. I account for this evidence into a tractable Heterogeneous-Agent New Keynesian (HANK) model with Search and Matching (S&M) frictions in the labor market and non-homothetic household preferences: energy price shocks directly impact producers and consumers, weighing more on the jobless due to non-homotheticity and the inability to perfectly insure against unemployment spells. Households' heterogeneous exposure to the shock induces an endogenous trade-off for monetary policy, whose optimal response involves partly accommodating core inflation so as to indirectly sustain employment, and prevent workers from becoming more exposed to the shock through unemployment. The second chapter studies, both analytically and quantitatively, the occurrence of demand-deficient recessions due to uninsurable unemployment risk when jobs are endogenously destroyed. The ensuing unemployment fears induce a precautionary saving motive that counteracts the desire to borrow during recessions: negative productivity shocks may induce falling natural interest rates and positive unemployment gaps. Analytically, these demand-deficient recessions are shown to already occur with less rigid wages when jobs are endogenously destroyed, compared to the case of exogenous job destruction. Quantitatively, the demand-deficient nature of supply-driven recessions can only be captured when accounting for endogenous job destruction. The third chapter studies the aggregate implications of uninsurable unemployment risk in an economy where nominal interest rates are constrained at the zero lower bound (ZLB). Precautionary saving desires due to uninsurable unemployment risk can induce sizeable falls in the natural interest rate during productivity-driven recessions. When nominal interest rates are stuck at the ZLB, the only force that can accordingly bring about a fall in the real rate is (expected) inflation. Analytical results suggest that inflationary ZLB recession episodes are indeed a plausible outcome in this setting, as long as the monetary authority targets not only inflation, but also fluctuations in the unemployment rate or output. It is also shown under which restrictions this outcome can occur both in the exogenous and endogenous separation cases.