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Financial Market Imperfections, Labor Market Imperfections and Business Cycles

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  • Arnold, Lutz G

Abstract

A Greenwald-Stiglitz (1993) style rational expectations business cycle model is introduced in which uncorrelated productivity shocks or monetary shocks generate autocorrelated employment fluctuations due to financial constraints. The propagation mechanism is carefully modeled: because of capital market imperfections (only standard debt contracts are traded), firms' labor demand changes in response to changes in their balance-sheet position; because of labor market imperfections (efficiency wages), employment and unemployment fluctuate in response to shifts in labor demand. The virtue of the model is its simplicity. Despite the fact that unemployment is endogenous, the dynamic behavior of the model under rational expectations can be characterized analytically. Copyright 2002 by The editors of the Scandinavian Journal of Economics.

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  • Arnold, Lutz G, 2002. " Financial Market Imperfections, Labor Market Imperfections and Business Cycles," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 105-124.
  • Handle: RePEc:bla:scandj:v:104:y:2002:i:1:p:105-24
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    Cited by:

    1. Christophe RAULT & Anne-Gaël VAUBOURG, 2011. "Labour Market Institutions and Unemployment: does Finance Matter?," LEO Working Papers / DR LEO 983, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    2. Donatella Gatti & Christophe Rault & Anne-Gael Vaubourg, 2012. "Unemployment and finance: how do financial and labour market factors interact?," Oxford Economic Papers, Oxford University Press, pages 464-489.
    3. Giorgio Calcagnini & Annalisa Ferrando & Germana Giombini, 2015. "Multiple market imperfections, firm profitability and investment," European Journal of Law and Economics, Springer, vol. 40(1), pages 95-120, August.
    4. Spiros Bougheas & Richard Upward, 2013. "Endogenous participation in imperfect labor and capital markets," Economics Bulletin, AccessEcon, vol. 33(4), pages 2454-2464.
    5. Filipa Fernandes & Alexandros Kontonikas & Serafeim Tsoukas, 2014. "On the real effects of financial pressure: Evidence from euro area firm-level employment during the recent financial crisis," Working Papers 2014_09, Business School - Economics, University of Glasgow.
    6. Donatella Gatti & Anne-Gael Vaubourg, 2010. "Credit and Unemployment: Do Institutions Matter?," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, pages 37-43.
    7. Joydeep Bhattacharya & Shankha Chakraborty, 2005. "What do information frictions do?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 651-675.
    8. Bouët, Antoine & Vaubourg, Anne-Gaël, 2016. "Financial constraints and international trade with endogenous mode of competition," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 179-194.
    9. repec:hal:psewpa:halshs-00566792 is not listed on IDEAS

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