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The Macroeconomic Dynamics of Labor and Capital Market Imperfections

  • Nicolas Petrosky-Nadeau
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    This papers investigates the propagation properties of credit market imperfections when they affect the cyclical reallocation of labor. A costly state verification problem in the capital lending relationship leads to endogenous job separations of two types: workers lose their jobs either because firms downsize to meet their interest payments or because the production unit is shut down following bankruptcy. When calibrated on firm-level gross capital and worker flows, this generates a powerful propagation mechanism, measured as amplification of exogenous shocks and high persistence in output growth, as credit frictions affect the large flows that are worker layoffs. In addition, while matching key labor market statistics, the model implies that the cyclicality of employment adjustments are driven by both job losses and hirings, as documented in recent empirical research for the U.S..

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    File URL: https://economicdynamics.org/meetpapers/2007/paper_477.pdf
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    Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 477.

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    Date of creation: 2007
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    Handle: RePEc:red:sed007:477
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    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
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    1. Andre Kurmann & Nicolas Petrosky-Nadeau, 2006. "Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism," 2006 Meeting Papers 365, Society for Economic Dynamics.
    2. Krause, M.U. & Lubik, T.A., 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Discussion Paper 2003-113, Tilburg University, Center for Economic Research.
    3. 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.
    4. Michael W. Elsby & Ryan Michaels & Gary Solon, 2007. "The Ins and Outs of Cyclical Unemployment," NBER Working Papers 12853, National Bureau of Economic Research, Inc.
    5. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
    6. den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2003. "Liquidity flows and fragility of business enterprises," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1215-1241, September.
    7. Randy Becker & John Haltiwanger & Ron Jarmin & Shawn Klimek & Dan Wilson, 2005. "Micro and Macro Data Integration: The Case of Capital," Working Papers 05-02, Center for Economic Studies, U.S. Census Bureau.
    8. Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
    9. Covas, Francisco & Den Haan, Wouter, 2007. "The Role of Debt and Equity Finance over the Business Cycle," CEPR Discussion Papers 6145, C.E.P.R. Discussion Papers.
    10. Julio J. Rotemberg, 2006. "Cyclical wages in a search and bargaining model with large firms," Working Papers 06-5, Federal Reserve Bank of Boston.
    11. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
    12. Shigeru Fujita & Garey Ramey, 2006. "The cyclicality of job loss and hiring," Working Papers 06-17, Federal Reserve Bank of Philadelphia.
    13. Valerie A. Ramey & Matthew D. Shapiro, 2001. "Displaced Capital: A Study of Aerospace Plant Closings," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 958-992, October.
    14. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
    15. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
    16. Eisfeldt, Andrea L. & Rampini, Adriano A., 2007. "New or used? Investment with credit constraints," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2656-2681, November.
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