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Welfare Cost of Fluctuations: when Labor Market Search Interacts with Financial Frictions

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Abstract

We provide a quantitative assessment of welfare costs of fluctuations in a search model with financial frictions. The matching process in the labor market leads positive shocks to reduce unemployment less than negative shocks increase it. We show that the magnitude of this non-linearity is magnified frictions. This asymmetric effect of the business cycle leads to sizable welfare costs. The model also accounts for the responsiveness of the job finding rate to the business cycle as financial frictions endogenously generate counter-cyclical opportunity costs of opening a vacancy and wage sluggishness.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2014/14042.pdf
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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 14042.

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Length: 37 pages
Date of creation: Jun 2014
Date of revision:
Handle: RePEc:mse:cesdoc:14042

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Keywords: Welfare; business cycle; financial friction; labor market search.;

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  1. Barron, John M & Bishop, John, 1985. "Extensive Search, Intensive Search, and Hiring Costs: New Evidence on Employer Hiring Activity," Economic Inquiry, Western Economic Association International, vol. 23(3), pages 363-82, July.
  2. Arnaud Cheron & Francois Langot, 2004. "Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 476-493, April.
  3. Nicolas Petrosky-Nadeau & Lu Zhang, . "Unemployment Crises," GSIA Working Papers 2013-E5, Carnegie Mellon University, Tepper School of Business.
  4. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  5. Robert E. Hall, 2005. "Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market," NBER Working Papers 11183, National Bureau of Economic Research, Inc.
  6. Olivier Blanchard & Jordi Gali, 2007. "A New Keynesian Model with Unemployment," Kiel Working Papers 1335, Kiel Institute for the World Economy.
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