Credit imperfections, labor market frictions and unemployment: a DSGE approach

We construct and estimate a new-Keynesian DSGE model, integrating sticky prices in goods market and frictions in labor and credit markets. A search and matching labor market and a costly-state verication framework in the credit market are introduced. Capital spending, vacancy posting costs and wage bill require to be paid in advance of production and thus require external nancing in a frictional credit market. Search and matching in labor market is uncertain and costly. We nd that the procyclicality of the risk premium (the cost of external over internal funds) impacts the vacancy posting decision and thus the level of unemployment in the economy. Credit markets frictions may be the source of lower posting vacancies, lower bargained wages and higher unemployment level. Then, the transmission channel of shocks among both markets is investigated. We also analyze to what extent frictions alter main variables response to monetary and credit shocks. An empirical evidence is presented by regressing principle variables in both markets using a Bayesian VAR method. The shocks identication is based on sign restrictions and penalty function strategies. Moreover, the theoretical model is log-linearized around the steady-state and estimated using a Bayesian approach. The calibration is based on post-war US data and observed variables cover the period 1960-2007. We nd that asymmetric information in the credit market pushes up the marginal cost of labor by adding a risk premium to the negotiated wage, to compensate for uncertainty related to the recruitment process eciency. Although the wage is a result of a right-to-manage bargaining process, credit market imperfections aect labor supply through the nal good mark-up.