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The Macroeconomic Dynamics of Labor and Capital Market Imperfections

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  • Nicolas Petrosky-Nadeau
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    Abstract

    This papers investigates the propagation properties of credit market imperfections when they affect the cyclical reallocation of labor. A costly state verification problem in the capital lending relationship leads to endogenous job separations of two types: workers lose their jobs either because firms downsize to meet their interest payments or because the production unit is shut down following bankruptcy. When calibrated on firm-level gross capital and worker flows, this generates a powerful propagation mechanism, measured as amplification of exogenous shocks and high persistence in output growth, as credit frictions affect the large flows that are worker layoffs. In addition, while matching key labor market statistics, the model implies that the cyclicality of employment adjustments are driven by both job losses and hirings, as documented in recent empirical research for the U.S..

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 477.

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    Date of creation: 2007
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    Handle: RePEc:red:sed007:477

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    Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    1. Wouter den Haan & Garey Ramey & Joel Watson, 1999. "Liquidity Flows and Fragility of Business Enterprises," NBER Working Papers 7057, National Bureau of Economic Research, Inc.
    2. Eisfeldt, Andrea L. & Rampini, Adriano A., 2007. "New or used? Investment with credit constraints," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2656-2681, November.
    3. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
    4. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
    5. Yashiv, Eran, 2006. "U.S. Labor Market Dynamics Revisited," IZA Discussion Papers 2455, Institute for the Study of Labor (IZA).
    6. Francisco Covas & Wouter Denhaan, 2006. "The role of debt and equity finance over the business cycle," 2006 Meeting Papers 407, Society for Economic Dynamics.
    7. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
    8. Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 706-727, April.
    9. Randy A. Becker & John Haltiwanger, 2006. "Micro and Macro Data Integration: The Case of Capital," NBER Chapters, in: A New Architecture for the U.S. National Accounts, pages 541-610 National Bureau of Economic Research, Inc.
    10. Andre Kurmann & Nicolas Petrosky-Nadeau, 2006. "Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism," 2006 Meeting Papers 365, Society for Economic Dynamics.
    11. Leena Rudanko, 2007. "Idiosyncratic and Aggregate Risk in a Frictional Labor Market," 2007 Meeting Papers 168, Society for Economic Dynamics.
    12. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
    13. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
    14. Michael W. Elsby & Ryan Michaels & Gary Solon, 2007. "The Ins and Outs of Cyclical Unemployment," NBER Working Papers 12853, National Bureau of Economic Research, Inc.
    15. Bruce Fallick & Charles A. Fleischman, 2004. "Employer-to-employer flows in the U.S. labor market: the complete picture of gross worker flows," Finance and Economics Discussion Series 2004-34, Board of Governors of the Federal Reserve System (U.S.).
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