Aggregate Job Destruction and Inventory Liquidation

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In a recession, jobs are destroyed and inventories are liquidated. I concentrate on the intertemporal mechanisms that result in economy-wide job destruction and inventory runoffs. Forces that raise the real interest rate -- especially temporarily -- also cause destruction and runoffs. I consider a model where the job destruction decision is made efficiently, will full consideration of the search costs imposed on discharged workers. I also consider a model of inefficient job destruction, where employers discharge workers who are paid fixed wages as long as they are employed. The impulse response functions for these models resemble those found in data for the United States. A shock that causes a jump in the expected real interest rate results in an immediate spike of job destruction and inventory liquidation, followed by a declining pattern of additional destruction and runoff.

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