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Credit constraints and the persistence of unemployment

  • Dromel, Nicolas L.
  • Kolakez, Elie
  • Lehmann, Etienne

In this paper, we argue that credit market imperfections impact not only the level of unemployment, but also its persistence. For this purpose, we first develop a theoretical model based on the equilibrium matching framework of Mortensen and Pissarides (1999) and Pissarides (2000) where we introduce credit constraints. We show these credit constraints not only increase steady-state unemployment, but also slow down the transitional dynamics. We then provide an empirical illustration based on a country panel dataset of 20 OECD countries. Our results suggest that credit market imperfections significantly increase the persistence of unemployment.

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Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 17 (2010)
Issue (Month): 5 (October)
Pages: 823-834

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Handle: RePEc:eee:labeco:v:17:y:2010:i:5:p:823-834
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