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Welfare Cost of Fluctuations when Labor Market Search Interacts with Financial Frictions

Author

Listed:
  • Eleni Iliopulos

    (University of Evry and CEPREMAP)

  • François Langot

    (University of Le Mans (GAINS-TEPP & IRA), Paris School of Economics and IZA)

  • Thepthida Sopraseuth

    (University of Cergy Pontoise (THEMA) and CEPREMAP)

Abstract

We study the welfare costs of business cycles in a search and matching model with financial frictions à la Kiyotaki & Moore (1997). We investigate the mechanisms that allow the model to replicate the volatility on labor and financial markets. Business cycle costs are sizable and asymmetric. This result is not trivial because the introduction of financial frictions does not per se always dampen welfare. Indeed, when credit costs are counter-cyclical and very responsive to productivity shocks, firms could benefit so much from the fall in hiring costs that the average job finding rate lies above its steady state value.

Suggested Citation

  • Eleni Iliopulos & François Langot & Thepthida Sopraseuth, 2017. "Welfare Cost of Fluctuations when Labor Market Search Interacts with Financial Frictions," Documents de recherche 17-02, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  • Handle: RePEc:eve:wpaper:17-02
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    Cited by:

    1. Marine Salès, 2016. "Do Corporate Credit Conditions Alter Labor Market Dynamics? A SVAR Analysis in a Transatlantic Perspective," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01333025, HAL.
    2. Acedański, Jan, 2016. "Youth unemployment and welfare gains from eliminating business cycles — The case of Poland," Economic Modelling, Elsevier, vol. 57(C), pages 248-262.
    3. Adjemian, Stéphane & Karamé, Frédéric & Langot, François, 2021. "Nonlinearities and Workers' Heterogeneity in Unemployment Dynamics," IZA Discussion Papers 14822, Institute of Labor Economics (IZA).
    4. Francesco Corsello & Valerio Nispi Landi, 2020. "Labor Market and Financial Shocks: A Time‐Varying Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 777-801, June.
    5. Boeri, Tito & Garibaldi, Pietro & Moen, Espen R., 2018. "Financial constraints in search equilibrium: Mortensen Pissarides meet Holmstrom and Tirole," Labour Economics, Elsevier, vol. 50(C), pages 144-155.
    6. Tervala, Juha, 2021. "Hysteresis and the welfare costs of recessions," Economic Modelling, Elsevier, vol. 95(C), pages 136-144.
    7. Michał Brzoza-Brzezina & Jacek Suda, 2021. "Are DSGE models irreparably flawed?," Bank i Kredyt, Narodowy Bank Polski, vol. 52(3), pages 227-252.
    8. Marine Salès, 2016. "Do Corporate Credit Conditions Alter Labor Market Dynamics? A SVAR Analysis in a Transatlantic Perspective," Working Papers hal-01333025, HAL.

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    More about this item

    Keywords

    Welfare; business cycle; financial friction; labor market search;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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