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Financial Market Imperfections, Labor Market Imperfections and Business Cycles

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  • Arnold, Lutz G

Abstract

A Greenwald-Stiglitz (1993) style rational expectations business cycle model is introduced in which uncorrelated productivity shocks or monetary shocks generate autocorrelated employment fluctuations due to financial constraints. The propagation mechanism is carefully modeled: because of capital market imperfections (only standard debt contracts are traded), firms' labor demand changes in response to changes in their balance-sheet position; because of labor market imperfections (efficiency wages), employment and unemployment fluctuate in response to shifts in labor demand. The virtue of the model is its simplicity. Despite the fact that unemployment is endogenous, the dynamic behavior of the model under rational expectations can be characterized analytically. Copyright 2002 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 104 (2002)
Issue (Month): 1 ()
Pages: 105-24

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Handle: RePEc:bla:scandj:v:104:y:2002:i:1:p:105-24

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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References

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  1. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  3. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-58, December.
  4. Piketty, Thomas, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 173-89, April.
  5. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  6. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  7. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May.
  8. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, September.
  9. Lutz Arnold, 2000. "A Model of Debt Deflation and the Phillips Curve: Implications for Business Cycles and the Balance Sheet Channel of Monetary Policy," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 220(4), pages 385-399.
  10. Greenwald, Bruce C. & Stiglitz, Joseph E., 1987. "Imperfect information, credit markets and unemployment," European Economic Review, Elsevier, vol. 31(1-2), pages 444-456.
  11. Fazzari, Steven M & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Investment, Financing Decisions, and Tax Policy," American Economic Review, American Economic Association, vol. 78(2), pages 200-205, May.
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  14. Gilson, Stuart C., 1989. "Management turnover and financial distress," Journal of Financial Economics, Elsevier, vol. 25(2), pages 241-262, December.
  15. Arnold, Lutz G., 2002. "Business Cycle Theory," OUP Catalogue, Oxford University Press, number 9780199256822, September.
  16. Gale, Douglas, 1983. "Competitive Models with Keynesian Features," Economic Journal, Royal Economic Society, vol. 93(369a), pages 17-33, Supplemen.
  17. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  18. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  19. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
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Cited by:
  1. Bhattacharya, Joydeep & Chakraborty, Shankha, 2003. "What Do Information Frictions Do?," Staff General Research Papers 10254, Iowa State University, Department of Economics.
  2. Spiros Bougheas & Richard Upward, . "Endogenous Participation in Imperfect Labour and Capital Markets," Discussion Papers 12/13, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  3. Donatella Gatti & Christophe Rault & Anne-Gael Vaubourg, 2012. "Unemployment and finance: how do financial and labour market factors interact?," Oxford Economic Papers, Oxford University Press, vol. 64(3), pages 464-489, July.
  4. repec:hal:wpaper:halshs-00566792 is not listed on IDEAS
  5. Giorgio Calcagnini & Annalisa Ferrando & Germana Giombini, 2013. "Multiple Market Imperfections, Firm Profitability and Investment," Working Papers 1305, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2013.
  6. repec:hal:psewpa:halshs-00566792 is not listed on IDEAS
  7. Donatella Gatti & Anne-Gael Vaubourg, 2010. "Credit and Unemployment: Do Institutions Matter?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 11(1), pages 37-43, 04.

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