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Credit, Vacancies and Unemployment Fluctuations

  • Nicolas Petrosky-Nadeau

The propagation properties of the standard search and matching model of equilibrium unemployment are significantly altered when vacancy costs require some external financing on frictional credit markets. The latter induce variation in the shadow cost of external funds of the cycle that greatly increase the elasticity of vacancy postings to productivity through two distinct channels: (i) a cost channel - a lowered shadow cost during an upturn as credit constraints are relaxed increases the incentive to post vacancies; (ii) a wage channel - the improved bargaining position of firms afforded by the lowered cost of vacancies limits of the upward pressure of market tightness on wages. As a result, the model can match the observed volatility of unemployment, vacancies and labor market tightness. Moreover, the progressive easing of financing constraints to innovations generates persistence in the response of market tightness and vacancies, a robust feature of the data and shortcoming of the standard model.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2009-E27.

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Date of creation: Nov 2009
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Handle: RePEc:cmu:gsiawp:1258554433
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