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 (2004) 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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Date of creation: 01 Oct 2007
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Financial liberalization; Volatility; Labour share; Credit constraint;
Other versions of this item:
- Orgiazzi, Elsa, 2008. "Financial development and instability: The role of the labour share," Research in Economics, Elsevier, vol. 62(4), pages 215-236, December.
- 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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