Nicolas Petrosky-Nadeau, Vice President, Federal Reserve Bank of San Francisco

Nicolas Petrosky-Nadeau

Vice President

Macroeconomic Research

Macroeconomics, Labor, Business cycles

Nicolas.Petrosky-Nadeau (at)

CV (pdf, 75.74 kb)

Profiles: Google Scholar | Personal website

Working Papers
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Replicating and Projecting the Path of COVID-19 with a Model-Implied Reproduction Number

2020-24 | With Buckman, Glick, Lansing, and Seitelman | June 2020

abstract (+)
We fit a simple epidemiology model to daily data on the number of currently-infected cases of COVID-19 in China, Italy, the United States, and Brazil. These four countries can be viewed as representing different stages, from late to early, of a COVID-19 epidemic cycle. We solve for a model-implied effective reproduction number Rt each day so that the model closely replicates the daily number of currently infected cases in each country. Using the model-implied time series of Rt, we construct a smoothed version of the in-sample trajectory which is used to project the future evolution of Rt and the out-of-sample number of infected and closed cases (recovered or deceased). For the United States, the number of infected cases is projected to peak around July 19. For Brazil, the number of infected cases is projected to peak around July 24. We show that declines in measures of population mobility tend to precede declines in the model-implied reproduction numbers for each country. This pattern suggests that mandatory and voluntary stay-at-home behavior and social distancing in recent months has helped to reduce the effective reproduction number and reduce the spread of COVID-19.
Unemployment Paths in a Pandemic Economy

2020-18 | With Valletta | May 2020

abstract (+)
The COVID-19 pandemic has upended the U.S. economy and labor market. We assess the initial spike in unemployment due to the virus response and possible paths for the official unemployment rate through 2021. Substantial uncertainty surrounds the path for measured unemployment, depending on the path of the virus and containment measures and their impact on reported job search activity. We assess potential unemployment paths based on historical patterns of monthly flows in and out of unemployment, adjusted for unique features of the virus economy. The possible paths vary widely, but absent hiring activity on an unprecedented scale, unemployment could remain in double-digits into 2021. We also find that the increase in measured unemployment could be meaningfully tempered by a substantial reduction in labor force participation.
Search Demand Effects on Equilibrium Unemployment and a Wage Phillips Curve

2018-13 | With Wasmer and Weil | May 2019

abstract (+)
We study an economy with frictional goods and labor markets. Aggregate demand determines the marginal revenue of labor through its effect on the price for the good sold and the likelihood of finding demand. The constrained efficient price maximizes the marginal revenue of labor, balancing the price and trading effects, while the constrained efficient wage trades off the benefits of job creation against the cost of turnover in the labor market. This double Hosios condition on prices and wages also minimizes the elasticity of labor market tightness and the volatility of the economy to a demand shock. Moreover, the relative response of wages and unemployment, the slope of a wage Phillips curve, flattens as workers lose bargaining power, and is minimized when there is efficient rent sharing in the goods market between consumers and producers.
Published Articles (Refereed Journals and Volumes)
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Unemployment Crises

Forthcoming in Journal of Monetary Economics | With Zhang

abstract (+)
An equilibrium search model with credible bargaining, when calibrated to the mean and volatility of postwar unemployment rates, is a good start to understanding the unemployment crisis in the Great Depression. Drawing from rarely used data sources, this paper compiles historical monthly time series of U.S. unemployment rates, vacancy rates, and labor productivity, some of which date back to 1890. The frequency, persistence, and severity of the unemployment crises in the model are quantitatively consistent with those in the historical data.
Endogenous Disasters

American Economc Review 108(8), August 2018, 2212-2245 | With Zhang and Kuehn

abstract (+)
Market economies are intrinsically unstable. The standard search model of equilibrium unemployment, once solved accurately with a globally nonlinear algorithm, gives rise endogenously to rare disasters. Intuitively, in the presence of cumulatively large negative shocks, inertial wages remain relatively high, and reduce profits. The marginal costs of hiring run into downward rigidity, which stems from the trading externality of the matching process, and fail to decline relative to profits. Inertial wages and rigid hiring costs combine to stifle job creation flows, depressing the economy into disasters. The disaster dynamics are robust to extensions to home production, capital accumulation, and recursive utility.
Disentangling Goods, Labor, and Credit Market Frictions in Three European Economies

Labour Economics 50, March 2018, 180-196 | With Brzustowski and Wasmer

abstract (+)
We build a flexible model with search frictions in three markets: credit, labor, and goods markets. We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and an economy with structural rigidities (Spain). In the three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of total entry costs. In the goods market, adverse supply shocks are amplified through their propagation to the demand side, as they also imply income losses for consumers. This adds up to, at most, an additional 15% to 25% to the impact of the shocks. Finally, the speed of matching in the goods market and the credit market accounts for a small fraction of unemployment: Most of the variation in unemployment comes from the speed of matching in the labor market.
Solving the Diamond-Mortensen-Pissarides Model Accurately

Quantitative Economics 8(2), July 2017, 611-650 | With Zhang

abstract (+)
An accurate global projection algorithm is critical for quantifying the basic moments of the Diamond-Mortensen-Pissarides model. Log linearization understates the mean and volatility of unemployment, but overstates the volatility of labor market tightness and the magnitude of the unemployment–vacancy correlation. Log linearization also understates the impulse responses in unemployment in recessions, but overstates the responses in the market tightness in booms. Finally, the second-order perturbation in logs can induce severe Euler equation errors, which are often much larger than those from log linearization.
Financial Frictions, the Housing Market, and Unemployment

Journal of Economic Theory 164, July 2016, 101-135 | With Branch and Rocheteau

abstract (+)
We develop a two-sector search-matching model of the labor market with imperfect mobility of workers, augmented to incorporate a housing market and a frictional goods market. Homeowners use home equity as collateral to finance idiosyncratic consumption opportunities. A financial innovation that raises the acceptability of homes as collateral raises house prices and reduces unemployment. It also triggers a reallocation of workers, with the direction of the change depending on firms’ market power in the goods market. A calibrated version of the model under adaptive learning can account for house prices, sectoral labor flows, and unemployment rate changes over 1996–2010.
Shopping Time

Economics Letters 143, June 2016, 52-60 | With Wasmer and Zeng

abstract (+)
The renewal of interest in macroeconomic theories of search frictions in the goods market requires a deeper understanding of the cyclical properties of the intensive margins in this market. We review the theoretical mechanisms that promote either procyclical or countercyclical movements in time spent searching for consumer goods and services, and then use the American Time Use Survey to measure shopping time through the Great Recession. Average time spent searching declined in the aggregate over the period 2008-2010 compared to 2005-2007, and the decline was largest for the unemployed who went from spending more to less time searching for goods than the employed. Cross-state regressions point towards a procyclicality of consumer search in the goods market. At the individual level, time allocated to different shopping activities is increasing in individual and household income. Overall, this body of evidence supports procyclical consumer search effort in the goods market and a conclusion that price comparisons cannot be a driver of business cycles.
Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions

Journal of Monetary Economics 72, May 2015, 97-113 | With Wasmer

abstract (+)
Goods market frictions drastically change the dynamics of the labor market, both in terms of persistence and volatility. In a model with three imperfect markets – goods, labor, and credit – we find that credit and goods market imperfections are substitutable in raising volatility. Goods market frictions are unique in generating persistence. Two key mechanisms in the goods market generate large hump-shaped responses to productivity shocks: countercyclical goods market tightness and prices alter future profit flows and raise persistence; procyclical search effort of consumers and firms raises amplification. Goods market frictions are thus key in understanding labor market dynamics.
Credit, Vacancies and Unemployment Fluctuations

Review of Economic Dynamics 17(2), April 2014, lead article

abstract (+)
Propagation in equilibrium models of search unemployment is altered when vacancy costs require some external financing on frictional credit markets. The easing of financing constraints during an expansion as firms accumulate net worth reduces the opportunity cost for resources allocated to job creation. The dynamics of market tightness are affected by (i) a cost channel, increasing the incentive to recruit for a given benefit from a new hire, and (ii) a wage channel, whereby firms’ improved bargaining position limits the upward pressure of market tightness on wages. Agency related credit frictions endogenously generate persistence in the dynamics of labor-market tightness, and have a moderate endogenous effect on amplification.
TFP During a Credit Crunch

Journal of Economic Theory 148(3), May 2013, 1150-1178

abstract (+)
The financial crisis of 2008 was followed by sharp contractions in aggregate output and The financial crisis of 2008 was followed by sharp contractions in aggregate output and employment and an unusual increase in aggregate total factor productivity (TFP). This paper attempts to explain these facts by modeling the creation and destruction of jobs in the presence of heterogeneity in firm productivity and frictional credit and labor markets. The aggregate level of TFP is determined by both the underlying distribution of firm productivity and the structures of the credit and labor markets. Adverse shocks to credit markets destroy the least productive jobs and slow job creation, thus raising aggregate TFP and unemployment, and reducing output.
The Cyclical Volatility of Labor Markets under Frictional Financial Market

American Economic Journal: Macroeconomics 5(1), January 2013, 193-221 | With Wasmer

abstract (+)
We provide a dynamic extension of an economy with search on credit and labor markets (Wasmer and Weil, 2004). Financial frictions create volatility: they add an additional, almost acyclical, entry cost to procyclical job creation costs, thus increasing the elasticity of labor market tightness to productivity shocks by a factor of 5 to 8, compared to a matching economy with perfect financial markets. We characterize a dynamic financial multiplier, that is increasing in total financial costs and minimized under a credit market Hosios-Pissarides rule. Financial frictions are an element of the solution to the volatility puzzle.
FRBSF Publications
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An Unemployment Crisis after the Onset of COVID-19

Economic Letter 2020-12 | May 18, 2020 | With Valletta

Unemployment: Lower for Longer?

Economic Letter 2019-21 | August 19, 2019 | With Valletta

Why Aren’t U.S. Workers Working?

Economic Letter 2018-24 | November 13, 2018 | With Daly, Pedtke, and Schweinert

Job-to-Job Transitions in an Evolving Labor Market

Economic Letter 2016-34 | November 14, 2016 | With Bosler

Changes in Labor Participation and Household Income

Economic Letter 2016-02 | February 1, 2016 | With Hall

Other Works
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Discussion of “Liquidity Provision, Interest Rates, and Unemployment,” by G. Rocheteau

Journal of Monetary Economics, Fall 2013