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Financial Markets and Unemployment

  • Tommaso Monacelli
  • Vincenzo Quadrini
  • Antonella Trigari

We study the importance of financial markets for (un)employment fluctuations in a model with searching and matching frictions where firms issue debt under limited enforcement. Higher debt allows employers to bargain lower wages which in turn increases the incentive to create jobs. The transmission mechanism of 'credit shocks' is fundamentally different from the typical credit channel and the model can explain why firms cut hiring after a credit contraction even if they have not shortage of funds for hiring workers. The theoretical predictions are consistent with the estimation of a structural VAR whose identifying restrictions are derived from the theoretical model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17389.

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Date of creation: Sep 2011
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Handle: RePEc:nbr:nberwo:17389
Note: EFG
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  18. Bronars, Stephen G & Deere, Donald R, 1991. "The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 231-54, February.
  19. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
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