Financial development and instability: The role of the labour share
AbstractThis paper examines the role of the labour share in creating instability in a small open economy. We assume that financial markets are imperfect so that entrepreneurs are credit constrained, and that this constraint is tighter for low levels of financial development. Aghion, Bacchetta and Banerjee [Aghion, P., Bacchetta, P., Banerjee, A., 2004. Financial development and the instability of open economies. Journal of Monetary Economics 51, 1077-1106] have shown that as the degree of financial development increases, output rises but instability appears for intermediate levels of financial development. Crucially, they assume that labour is paid before production takes place, and hence crises are solely due to the increased cost of debt repayment as firms accumulate capital. We show that under the more reasonable assumption that wages are paid at the end of the period, changes in the labour share also play a role in eroding profitability. Our analysis also predicts that financial crises are associated with substantial movements in the sharing of value added between capital and labour.
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Bibliographic InfoArticle provided by Elsevier in its journal Research in Economics.
Volume (Year): 62 (2008)
Issue (Month): 4 (December)
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Web page: http://www.elsevier.com/locate/inca/622941
Financial liberalization Volatility Labour share Credit constraint;
Other versions of this item:
- Elsa Orgiazzi, 2007. "Financial Development And Instability:The Role Of The Labour Share," Working Papers halshs-00353889, HAL.
- ORGIAZZI, Elsa, 2007. "Financial Development and Instability: the Role of the Labour Share," MPRA Paper 6304, University Library of Munich, Germany.
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
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