IDEAS home Printed from https://ideas.repec.org/a/wly/soecon/v88y2022i3p1199-1238.html
   My bibliography  Save this article

A liquidity crunch in an endogenous growth model with human capital

Author

Listed:
  • Sergio Salas

Abstract

There is by now reasonable evidence that supports the notion of a trend break in the U.S. GDP since the Great Recession. To explain this phenomenon, I construct a version of the Lucas endogenous growth model, amplified with financial frictions and financial disruptions in the firms' sector. I then show how a transitory liquidity crunch is capable, at least qualitatively, of producing a similar pattern of a persistent downward shift in the GDP trend as one could infer happened in the United States since 2008. The main mechanism by which such a result is found relies on workers' decisions on providing labor to firms versus accumulating human capital. I show that a transitory liquidity crunch reduces the demand of labor. Workers anticipating a phase of depressed wages make the decision of accumulating more human capital in the short run, thereby reducing labor supply to firms. In the long run, however, incentivized by a strong recovery, workers decrease human capital accumulation and increase labor supply. Under plausible parameterizations of the model, this situation produces a net effect of a decrease in overall productivity that permanently reduces the trend at which the economy was growing prior to the crisis.

Suggested Citation

  • Sergio Salas, 2022. "A liquidity crunch in an endogenous growth model with human capital," Southern Economic Journal, John Wiley & Sons, vol. 88(3), pages 1199-1238, January.
  • Handle: RePEc:wly:soecon:v:88:y:2022:i:3:p:1199-1238
    DOI: 10.1002/soej.12549
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/soej.12549
    Download Restriction: no

    File URL: https://libkey.io/10.1002/soej.12549?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
    2. Gary Solon & Robert Barsky & Jonathan A. Parker, 1994. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias?," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 1-25.
    3. Mathieu Taschereau-Dumouchel & Edouard Schaal, 2015. "Coordinating Business Cycles," 2015 Meeting Papers 178, Society for Economic Dynamics.
    4. Benjamin Moll, 2014. "Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation?," American Economic Review, American Economic Association, vol. 104(10), pages 3186-3221, October.
    5. Pablo A. Guerron‐Quintana & Ryo Jinnai, 2019. "Financial frictions, trends, and the great recession," Quantitative Economics, Econometric Society, vol. 10(2), pages 735-773, May.
    6. Andrea Ajello, 2016. "Financial Intermediation, Investment Dynamics, and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 106(8), pages 2256-2303, August.
    7. Pedro Carneiro & James J. Heckman & Edward J. Vytlacil, 2011. "Estimating Marginal Returns to Education," American Economic Review, American Economic Association, vol. 101(6), pages 2754-2781, October.
    8. Marco Del Negro & Gauti Eggertsson & Andrea Ferrero & Nobuhiro Kiyotaki, 2017. "The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities," American Economic Review, American Economic Association, vol. 107(3), pages 824-857, March.
    9. Shi, Shouyong, 2015. "Liquidity, assets and business cycles," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 116-132.
    10. Nobuhiro Kiyotaki & John Moore, 2005. "2002 Lawrence R. Klein Lecture Liquidity And Asset Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 317-349, May.
    11. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
    12. Gauti B. Eggertsson & Neil R. Mehrotra & Jacob A. Robbins, 2019. "A Model of Secular Stagnation: Theory and Quantitative Evaluation," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 1-48, January.
    13. Barro, Robert J. & Lee, Jong Wha, 2013. "A new data set of educational attainment in the world, 1950–2010," Journal of Development Economics, Elsevier, vol. 104(C), pages 184-198.
    14. Daniel Schaefer & Carl Singleton, 2017. "Real Wages and Hours in the Great Recession: Evidence from Firms and their Entry-Level Jobs," CESifo Working Paper Series 6766, CESifo.
    15. Stephanie Schmitt-Grohé & Martín Uribe, 2017. "Liquidity Traps and Jobless Recoveries," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 165-204, January.
    16. Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2020. "The Tail That Wags the Economy: Beliefs and Persistent Stagnation," Journal of Political Economy, University of Chicago Press, vol. 128(8), pages 2839-2879.
    17. Yu-Fan Huang & Sui Luo, 2018. "Potential output and inflation dynamics after the Great Recession," Empirical Economics, Springer, vol. 55(2), pages 495-517, September.
    18. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    19. Nobuhiro Kiyotaki & John Moore, 2019. "Liquidity, Business Cycles, and Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 2926-2966.
    20. John G. Fernald & Robert E. Hall & James H. Stock & Mark W. Watson, 2017. "The Disappointing Recovery of Output after 2009," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 1-81.
    21. Michael W. L. Elsby & Donggyun Shin & Gary Solon, 2016. "Wage Adjustment in the Great Recession and Other Downturns: Evidence from the United States and Great Britain," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages 249-291.
    22. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.
    23. George-Marios Angeletos, 2007. "Uninsured Idiosyncratic Investment Risk and Aggregate Saving," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 1-30, January.
    24. Diego Anzoategui & Diego Comin & Mark Gertler & Joseba Martinez, 2019. "Endogenous Technology Adoption and R&D as Sources of Business Cycle Persistence," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 67-110, July.
    25. Robert J. Gordon, 2014. "The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections," NBER Working Papers 19895, National Bureau of Economic Research, Inc.
    26. Christina D. Romer & David H. Romer, 2017. "New Evidence on the Aftermath of Financial Crises in Advanced Countries," American Economic Review, American Economic Association, vol. 107(10), pages 3072-3118, October.
    27. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2019. "The Tail That Keeps the Riskless Rate Low," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 253-283.
    2. Werner, Maximilian, 2023. "Occasionally binding liquidity constraints and macroeconomic dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 150(C).
    3. Marco Del Negro & Domenico Giannone & Marc P. Giannoni & Andrea Tambalotti, 2017. "Safety, Liquidity, and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 235-316.
    4. Ohdoi, Ryoji, 2020. "Financial Shocks to Banks, R&D Investment, and Recessions," MPRA Paper 101993, University Library of Munich, Germany.
    5. Pablo A. Guerron-Quintana & Tomohiro Hirano & Ryo Jinnai, 2021. "Bubbles, Crashes, Ups and Downs in Economic Growth Theory and Evidence," CIGS Working Paper Series 21-006E, The Canon Institute for Global Studies.
    6. Mahdi Nezafat & Ctirad Slavik, 2021. "Asset Prices and Business Cycles with Liquidity Shocks," CERGE-EI Working Papers wp711, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    7. Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2020. "The Tail That Wags the Economy: Beliefs and Persistent Stagnation," Journal of Political Economy, University of Chicago Press, vol. 128(8), pages 2839-2879.
    8. Marco Bassetto & Wei Cui, 2020. "A Ramsey Theory of Financial Distortions," Working Papers 775, Federal Reserve Bank of Minneapolis.
    9. Francesco Furlanetto & Ørjan Robstad & Pål Ulvedal & Antoine Lepetit, 2020. "Estimating hysteresis effects," Working Paper 2020/13, Norges Bank.
    10. Alessandro Ferrari & Francisco Queirós, 2021. "Firm Heterogeneity, Market Power and Macroeconomic Fragility," CSEF Working Papers 627, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    11. Pablo A. Guerron-Quintana & Tomohiro Hirano & Ryo Jinnai, 2019. "Recurrent Bubbles and Economic Growth," CARF F-Series CARF-F-457, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    12. Wei Cui, 2017. "Macroeconomic Effects of Delayed Capital Liquidation," Discussion Papers 1719, Centre for Macroeconomics (CFM).
    13. Jones, C.I., 2016. "The Facts of Economic Growth," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 3-69, Elsevier.
    14. Salas, Sergio & Odell, Kathleen, 2023. "Why are credit-driven crises deep and long-lasting?," The Quarterly Review of Economics and Finance, Elsevier, vol. 90(C), pages 233-246.
    15. Fève, Patrick & Moura, Alban & Pierrard, Olivier, 2022. "The fall in shadow banking and the slow U.S. recovery," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    16. Sergio Salas & Kathleen Odell, 2020. "Financial Deepening, Credit Crises, Human Capital and Growth," Working Papers 2020-01, Escuela de Negocios y Economía, Pontificia Universidad Católica de Valparaíso.
    17. Janice C. Eberly & James H. Stock & Jonathan H. Wright, 2020. "The Federal Reserve's Current Framework for Monetary Policy: A Review and Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 16(1), pages 5-71, February.
    18. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, July.
    19. Guohua He & Zirun Hu, 2023. "Precautionary Saving and Liquidity Shortage," Sustainability, MDPI, vol. 15(3), pages 1-15, January.
    20. Dong, Feng & Wang, Pengfei & Wen, Yi, 2020. "A search-based neoclassical model of capital reallocation," European Economic Review, Elsevier, vol. 128(C).

    More about this item

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:soecon:v:88:y:2022:i:3:p:1199-1238. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)2325-8012 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.