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The cyclical volatility of labor markets under frictional financial markets

  • Nicolas Petrosky-Nadeau
  • Etienne Wasmer

This paper shows in an economy with search on credit and labor markets that a financial multiplier raises the elasticity of labor market tightness to productivity shocks, and that this multiplier is an increasing function of total financial costs in the economy. Under a credit market Hosios-Pissarides rule, total search costs in the credit market are minimized, and so is the financial multiplier. Relaxing that condition leads to larger multipliers which can match or even overshoot the elasticity of market tightness in the data. The reason is similar to that of Hagedorn and Manovskii (2008) small labor surplus assumption: we identify the configurations of parameters leading to small "bank" surplus or a small "firm surplus" in the credit market, conducive of an amplification of productivity shocks. Furthermore, when wages are endogenous, it is possible to partially relax the small labor surplus assumption in order to match the data.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2010-E1.

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Handle: RePEc:cmu:gsiawp:1263568949
Contact details of provider: Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
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  1. Petrongolo, Barbara & Pissarides, Christopher, 2000. "Looking Into The Black Box: A Survey Of The Matching Function," CEPR Discussion Papers 2409, C.E.P.R. Discussion Papers.
  2. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
  3. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  4. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
  5. Steven J. Davis & R. Jason Faberman & John Haltiwanger, 2006. "The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links," NBER Working Papers 12167, National Bureau of Economic Research, Inc.
  6. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
  7. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, vol. 74(2), pages 323-364, 03.
  8. Delacroix, Alain, 2006. "A multisectorial matching model of unions," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 573-596, April.
  9. Nicolas Petrosky-Nadeau, 2008. "Credit, Vacancies and Unemployment Fluctuations," 2008 Meeting Papers 640, Society for Economic Dynamics.
  10. Dale T. Mortensen & Eva Nagypal, 2005. "More on Unemployment and Vacancy Fluctuations," NBER Working Papers 11692, National Bureau of Economic Research, Inc.
  11. Philippe Weil & Etienne Wasmer, 2004. "The macroeconomics of credit and labor market imperfections," ULB Institutional Repository 2013/13436, ULB -- Universite Libre de Bruxelles.
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  1. The Cyclical Volatility of Labor Markets under Frictional Financial Markets (AEJ:MA 2013) in ReplicationWiki

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