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Financial Amplification of Labor Supply Shocks

Author

Listed:
  • Nina Biljanovska
  • Alexandros Vardoulakis

Abstract

We study how financial frictions amplify labor supply shocks in a macroeconomic model with occasionally binding financing constraints. Workers supply labor to entrepreneurs who borrow to purchase factors of production. Borrowing capacity is restricted by the value of capital, generating a pecuniary externality when financing constraints bind. Additionally, there is a distributive externality operating through wages. The planner’s allocation can be decentralized with two instruments: a credit tax/subsidy and a labor tax/subsidy. Labor shocks, such as the COVID-19 shock, amplify the policy responses, which critically depend on whether financing constraints bind or not.

Suggested Citation

  • Nina Biljanovska & Alexandros Vardoulakis, 2020. "Financial Amplification of Labor Supply Shocks," IMF Working Papers 2020/189, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2020/189
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