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Costly external finance and labor market dynamics

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  • Chugh, Sanjay K.

Abstract

We study the role of agency frictions and costly external finance in cyclical labor market dynamics, with a focus on how credit-market frictions may amplify aggregate TFP shocks. The main result is that aggregate TFP shocks lead to large fluctuations of labor market quantities if the model is calibrated to the empirically observed countercyclicality of the finance premium. A financial accelerator mechanism thus amplifies labor market fluctuations by rendering rigidity in real wage dynamics. In contrast, if the finance premium is procyclical, which the model can be parameterized to accommodate, amplification is absent, and labor-market fluctuations display the Shimer (2005) puzzle.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 12 ()
Pages: 2882-2912

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:12:p:2882-2912

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Credit frictions; Financial accelerator; Risk shocks; Labor search and matching; Volatility puzzle; Business cycle modeling;

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References

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Cited by:
  1. Zheng Liu & Jianjun Miao & Tao Zha, 2013. "Land Prices and Unemployment," NBER Working Papers 19382, National Bureau of Economic Research, Inc.
  2. Tommaso Monacelli & Vincenzo Quadrini & Antonella Trigari, 2011. "Financial Markets and Unemployment," NBER Working Papers 17389, National Bureau of Economic Research, Inc.

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