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

  • Eleni Iliopulos

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CEPREMAP - Centre pour la recherche économique et ses applications)

  • François Langot

    ()

    (GAINS-TEPP - UM - Université du Maine, Banque de France - Banque de France - Banque de France, IZA - Institute for the Study of Labor, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)

  • Thepthida Sopraseuth

    ()

    (CEPREMAP - Centre pour la recherche économique et ses applications, THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)

We provide a quantitative assessment of welfare costs of fluctuations in a search model with financial frictions. The matching process in the labor market leads positive shocks to reduce unemployment less than negative shocks increase it. We show that the magnitude of this non-linearity is magnified frictions. This asymmetric effect of the business cycle leads to sizable welfare costs. The model also accounts for the responsiveness of the job finding rate to the business cycle as financial frictions endogenously generate counter-cyclical opportunity costs of opening a vacancy and wage sluggishness.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-01020872.

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Date of creation: Jun 2014
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Publication status: Published in Documents de travail du Centre d'Economie de la Sorbonne 2014.42 - ISSN : 1955-611X. 2014
Handle: RePEc:hal:cesptp:halshs-01020872
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01020872
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  1. Blanchard, Olivier & Galí, Jordi, 2006. "A New Keynesian model with unemployment," CFS Working Paper Series 2007/08, Center for Financial Studies (CFS).
  2. Robert E. Hall, 2005. "Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market," NBER Working Papers 11183, National Bureau of Economic Research, Inc.
  3. Jean-Olivier Hairault & François Langot, 2010. "Markups and the Welfare Cost of Business Cycles: A Reappraisal," Documents de travail du Centre d'Economie de la Sorbonne 10043, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  5. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  6. Jean-Olivier Hairault, 2002. "Labor-Market Search and International Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 535-558, July.
  7. Barron, John M & Bishop, John, 1985. "Extensive Search, Intensive Search, and Hiring Costs: New Evidence on Employer Hiring Activity," Economic Inquiry, Western Economic Association International, vol. 23(3), pages 363-82, July.
  8. Tom Krebs, 2014. "Labor Market Reform and the Cost of Business Cycles," 2014 Meeting Papers 1017, Society for Economic Dynamics.
  9. Nicolas Petrosky-Nadeau, 2008. "Credit, Vacancies and Unemployment Fluctuations," 2008 Meeting Papers 640, Society for Economic Dynamics.
  10. Petrosky-Nadeau, Nicolas & Zhang, Lu, 2013. "Unemployment Crises," Working Paper Series 2014-11, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  11. Jean-Olivier Hairault & François Langot & Sophie Osotimehin, 2010. "Matching frictions, unemployment dynamics and the cost of business cycles," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00516832, HAL.
  12. Arnaud Cheron & Francois Langot, 2004. "Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 476-493, April.
  13. Jung, Philip & Kuester, Keith, 2011. "The (un)importance of unemployment fluctuations for the welfare cost of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1744-1768, October.
  14. Nicolas Petrosky-Nadeau & Lu Zhang, 2013. "Unemployment Crises," NBER Working Papers 19207, National Bureau of Economic Research, Inc.
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