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Aggregate Unemployment and Household Unsecured Debt

Author

Listed:
  • Zachary Bethune

    (University of California Santa Barbara)

  • Guillaume Rocheteau

    (University of California Irvine)

  • Peter Rupert

    (University of California Santa Barbara)

Abstract

This paper studies the relationship between the availability of unsecured credit to households and unemployment. We extend the Mortensen-Pissarides model to include a goods market with search and financial frictions. Households, who have limited commitment, face endogenous borrowing constraints when financing random consumption opportunities. We show that borrowing limits depend on the sophistication of the financial system, the frequency of liquidity shocks, and the rate of return on (partially) liquid assets that households can accumulate for self insurance. Moreover, firms' expected revenue is endogenous and depends on firms' market power in the goods market and the availability of unsecured credit to consumers. As a result of the complementarity between credit and labor markets, multiple steady states might exist. Across steady states unemployment and debt limits are negatively correlated. We calibrate the model to the U.S. labor and credit markets and illustrate the effects of an expansion in unsecured debt similar to that seen in the U.S. from 1978 to 2008. Under the baseline calibration, the rise in unsecured credit can account for approximately seventy percent of the decline in the long term average unemployment rate. (Copyright: Elsevier)

Suggested Citation

  • Zachary Bethune & Guillaume Rocheteau & Peter Rupert, 2015. "Aggregate Unemployment and Household Unsecured Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 77-100, January.
  • Handle: RePEc:red:issued:14-29
    DOI: 10.1016/j.red.2014.08.002
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Brzustowski, Thomas & Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2018. "Disentangling goods, labor, and credit market frictions in three European economies," Labour Economics, Elsevier, vol. 50(C), pages 180-196.
    2. Guillaume Rocheteau & Randall Wright & Cathy Zhang, 2018. "Corporate Finance and Monetary Policy," American Economic Review, American Economic Association, vol. 108(4-5), pages 1147-1186, April.
    3. Branch, William A. & Petrosky-Nadeau, Nicolas & Rocheteau, Guillaume, 2016. "Financial frictions, the housing market, and unemployment," Journal of Economic Theory, Elsevier, vol. 164(C), pages 101-135.
    4. repec:eee:dyncon:v:79:y:2017:i:c:p:184-200 is not listed on IDEAS
    5. Gajendran Raveendranathan, 2018. "Improved Matching, Directed Search, and Bargaining in the Credit Card Market," Department of Economics Working Papers 2018-05, McMaster University.
    6. Gajendran Raveendranathan, 2018. "Improved Matching, Directed Search, and Bargaining in the Credit Card Market," 2018 Meeting Papers 112, Society for Economic Dynamics.
    7. Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2018. "Limited Commitment and the Demand for Money," Economic Journal, Royal Economic Society, vol. 128(610), pages 1128-1156, May.
    8. Giorgia Piacentino & Anjan Thakor & Jason Donaldson, 2015. "Bank Capital, Bank Credit and Unemployment," 2015 Meeting Papers 1403, Society for Economic Dynamics.
    9. Huber, Samuel & Kim, Jaehong, 2017. "On the optimal quantity of liquid bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 184-200.
    10. Kyle Herkenhoff, 2014. "The Impact of Consumer Credit Access on Unemployment," 2014 Meeting Papers 448, Society for Economic Dynamics.
    11. Kyle Herkenhoff & Gordon Phillips & Ethan Cohen-Cole, 2016. "How Credit Constraints Impact Job Finding Rates, Sorting & Aggregate Output," Working Papers 16-25, Center for Economic Studies, U.S. Census Bureau.
    12. repec:eee:jetheo:v:175:y:2018:i:c:p:556-584 is not listed on IDEAS
    13. J. Carter Braxton & Gordon Phillips & Kyle Herkenhoff, 2018. "Can the Unemployed Borrow? Implications for Public Insurance," 2018 Meeting Papers 564, Society for Economic Dynamics.

    More about this item

    Keywords

    Credit; Unemployment; Limited commitment; Liquidity;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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