During downturns, workers get stuck in low-productivity jobs and wages remain stagnant. I build an heterogenous agent incomplete market model with a full job ladder that accounts for these facts. An adverse financial shock calibrated to the US Great Recession replicates the period’s slow recovery and missing disinflation.
The theory that rich economic diversity of businesses and households both affects and is shaped by economy-wide fluctuations has strong implications for monetary policy. This review places these insights in a Canadian context.