We will consider why financial markets occasionally dry up, why banks simultaneously borrow and lend to each other and how this affects financial risk and monetary policy. An important component of this analysis is that differences in information between holders of assets and potential buyers creates illiquidity, that is, holders find it costly to reverse an asset trade once made. The relationship between contagious illiquidity and market failure, such as we have seen in the financial crisis, is a core element of this theme.
Traditional models have difficulties accounting for the fluctuations, and the sluggishness in responses, of employment and wages. We will investigate this issue from two angles. First, we will look into the black-box of standard job search models by examining how job-seekers determine which jobs to apply for, how this changes with unemployment and how selections depend on occupation, salary and travel distance. Second, we will examine the nature of the employment relationship after job search is completed, its durability, the evolution of wages and productivity and the dependence of both on current, past, and anticipated macroeconomic conditions.
An economy is the aggregation of the activities in individual markets. It is important to know if behaviour at the level of individual markets is amplified or washed-out at the aggregate level. For example, if employment responses at the firm level are sluggish, does this imply sluggish responses at the macro level? Understanding this aggregation issue requires insight into the structure of employment responses at the firm level. We expect that the joint analysis of credit and labour markets and how they aggregate will provide new insights for the understanding of the macroeconomy.
Professor Michele Belot and Professor Philipp Kircher will run job search experiments as part of the MacCaLM project. The data generated by these experiments will be made available