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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6304.
Date of creation: 12 Oct 2007
Date of revision:
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.
- Elsa Orgiazzi, 2007. "Financial Development And Instability:The Role Of The Labour Share," Working Papers halshs-00353889, HAL.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-12-19 (All new papers)
- NEP-DEV-2007-12-19 (Development)
- NEP-FDG-2007-12-19 (Financial Development & Growth)
- NEP-MAC-2007-12-19 (Macroeconomics)
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