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The effect of credit shocks in the context of labor market frictions

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  • Liao, Shushu

Abstract

The recent financial crisis was associated with a large and prolonged deterioration of the credit supply. I build and calibrate a structural model to explore the impact of credit-supply shocks on firm behavior in the context of labor market frictions. I discover that (i) a negative shock to the credit supply can lead to a protracted depression in business activities when firms have a steady level of productivity (demand) and that (ii) a reduction of labor adjustment costs can improve investment and mitigate the negative impact of credit-supply shocks, especially for firms with a high level of productivity. I also empirically corroborate that a lower labor unionization rate can mitigate the negative impact of supply shocks on high-demand firms during a crisis.

Suggested Citation

  • Liao, Shushu, 2021. "The effect of credit shocks in the context of labor market frictions," Journal of Banking & Finance, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:jbfina:v:125:y:2021:i:c:s0378426621000492
    DOI: 10.1016/j.jbankfin.2021.106091
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    More about this item

    Keywords

    Financial crisis; Labor adjustment costs; Credit-supply shocks; Structural model;
    All these keywords.

    JEL classification:

    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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