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Equilibrium Default and Slow Recoveries

  • Joseph Mullins

    (NYU)

  • Gaston Navarro

    (New York University)

  • Julio Blanco

    (New York University)

Registered author(s):

    The 2007-2009 financial crisis generated a striking short-lived increase in the employment separation rate and a persistent decrease in its finding probability, which resulted in an increase in unemployment and a slow recovery. In this paper we propose a novel mechanism that can account for these patterns. The key innovation relies on the interaction between firms' number of workers and its willingness to default: firms with more debt per worker are less likely to repay and consequently face higher credit spreads. Therefore, at the aggregate level, credit conditions worsen with higher unemployment, which further reduces firms' incentives to hire resulting in a loop between the financial and the labor market.

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    File URL: https://www.economicdynamics.org/meetpapers/2013/paper_694.pdf
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    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 694.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:694
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
    Fax: 1-314-444-8731
    Web page: http://www.EconomicDynamics.org/society.htm
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    1. Fujita, Shigeru & Ramey, Garey, 2007. "Job matching and propagation," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3671-3698, November.
    2. Nicolas Petrosky-Nadeau, 2009. "Credit, Vacancies and Unemployment Fluctuations," GSIA Working Papers 2009-E27, Carnegie Mellon University, Tepper School of Business.
    3. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    4. Saki Bigio, 2012. "Financial Risk Capacity," 2012 Meeting Papers 97, Society for Economic Dynamics.
    5. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen Terry, 2013. "Really Uncertain Business Cycles," CEP Discussion Papers dp1195, Centre for Economic Performance, LSE.
    6. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
    7. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary Leverage Cycles and Financial Stability," Working Papers 2012-010, Becker Friedman Institute for Research In Economics.
    8. 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.
    9. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
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