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Credit Constraints and the Persistence of Unemployment

  • Dromel, Nicolas

    ()

    (University of Paris 1 Panthéon-Sorbonne)

  • Kolakez, Elie

    ()

    (University of Paris 2 - ERMES)

  • Lehmann, Etienne

    ()

    (CRED, Université Panthéon Assas Paris 2)

In this paper, we argue that credit market imperfections impact not only the level of unemployment, but also its persistence. For this purpose, we first develop a theoretical model based on the equilibrium matching framework of Mortensen and Pissarides (1999) and Pissarides (2000) where we introduce credit constraints. We show these credit constraints not only increase steady-state unemployment, but also slow down the transitional dynamics. We then provide an empirical illustration based on a country panel dataset of 20 OECD countries. Our results suggest that credit market imperfections significantly increase the persistence of unemployment.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4501.

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Length: 24 pages
Date of creation: Oct 2009
Date of revision:
Publication status: published in: Labour Economics, 2010, 17 (5), 823-834
Handle: RePEc:iza:izadps:dp4501
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  1. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
  2. Gatti, Donatella & Vaubourg, Anne-Gaël, 2009. "Unemployment and Finance: How Do Financial and Labour Market Factors Interact?," IZA Discussion Papers 4075, Institute for the Study of Labor (IZA).
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  8. Nicolas Petrosky-Nadeau, 2008. "Credit, Vacancies and Unemployment Fluctuations," 2008 Meeting Papers 640, Society for Economic Dynamics.
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  14. Donatella Gatti & Anne-Gaël Vaubourg, 2009. "Unemployment and finance: how do financial and labour market factors interact?," CEPN Working Papers halshs-00566792, HAL.
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  18. Etienne Wasmer & Philippe Weil, 2004. "The Macroeconomics of Labor and Credit Market Imperfections," American Economic Review, American Economic Association, vol. 94(4), pages 944-963, September.
  19. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228 Elsevier.
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