In the wake of the ‘Great Recession’, policymakers and banking groups attempted to understand why the existing financial models did not predict the recession, and why the existing models and structures were not adequate to deal with the aftermath of such a crisis.
To do this, the MacCaLM (or Credit and Labour Foundations of the Macroeconomy) researchers have combined their work into a specific programme to tackle the research questions surrounding these problems. This research programme is comprised of four distinct themes.
We consider why financial markets occasionally dry up and why banks simultaneously borrow and lend to each other. We question 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.
We aim to conduct an in-depth analysis of how job seekers search for work. Which vacancies do they apply for? What methods do they use to search? Does their methods of searching change depending on how long they’ve been unemployed? Do job seekers become more flexible with their choices over time? We are in the process of developing a search engine which will allow us to measure search methods and allow us to analyse the data. This data will become publicly available. It is our aim that the data and analysis will provide guidance to policymakers.
This is an ambitious project, but we aim to provide some answers to these challenging and crucial questions. The project is led by John Moore and based at the University of Edinburgh.
If you have any questions about our project, please get in touch.