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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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