The Macroeconomic Dynamics of Labor and Capital Market Imperfections
AbstractThis 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 InfoPaper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 477.
Date of creation: 2007
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