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Borrowing constraints, collateral fluctuations, and the labor market

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  • Garín, Julio

Abstract

This paper studies the effects of changes in collateral requirements on the cyclical properties of unemployment and job creation. I develop a general equilibrium model in which labor market frictions prevent the costless adjustment of employment. Financial frictions arise from an imperfect enforcement contract. An environment in which borrowing limits are linked to the firm׳s physical capital stock can quantitatively account for the sluggish response of labor market variables to productivity shocks. I find that fluctuations in those variables are mainly driven by changes in financial conditions. The model can explain 75% of the variation in job creation observed in the data, and it can also account for the persistent reduction in both output and leverage that follows a contraction in credit availability.

Suggested Citation

  • Garín, Julio, 2015. "Borrowing constraints, collateral fluctuations, and the labor market," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 112-130.
  • Handle: RePEc:eee:dyncon:v:57:y:2015:i:c:p:112-130
    DOI: 10.1016/j.jedc.2015.05.007
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Marine Salès, 2016. "Do Corporate Credit Conditions Alter Labor Market Dynamics? A SVAR Analysis in a Transatlantic Perspective," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01333025, HAL.
    2. repec:eee:labeco:v:50:y:2018:i:c:p:128-143 is not listed on IDEAS
    3. Fang, Lei & Nie, Jun, 2014. "Human Capital Dynamics and the U.S. Labor Market," FRB Atlanta Working Paper 2014-2, Federal Reserve Bank of Atlanta.
    4. Carrillo-Tudela, Carlos & Graber, Michael & Waelde, Klaus, 2018. "Unemployment and vacancy dynamics with imperfect financial markets," Labour Economics, Elsevier, vol. 50(C), pages 128-143.
    5. repec:eee:labeco:v:50:y:2018:i:c:p:144-155 is not listed on IDEAS
    6. Boeri, Tito & Garibaldi, Pietro & Moen, Espen R, 2015. "Financial Frictions, Financial Shocks and Unemployment Volatility," CEPR Discussion Papers 10648, C.E.P.R. Discussion Papers.
    7. Marine Salès, 2016. "Do Corporate Credit Conditions Alter Labor Market Dynamics? A SVAR Analysis in a Transatlantic Perspective," Working Papers hal-01333025, HAL.

    More about this item

    Keywords

    Financial frictions; Unemployment; Labor markets; Search and matching; Financial shocks;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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