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Bank Capital, Bank Credit and Unemployment

Author

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  • Giorgia Piacentino

    (Olin Business School at Washington University in St Louis)

  • Anjan Thakor

    (olin school of business)

  • Jason Donaldson

    (Washington University in St Louis)

Abstract

Since the worst employment slumps follow periods of high household debt and almost all household debt is provided by banks, there is a natural link between bank lending and employment. Building on this, we theoretically investigate whether bank regulation can play a role in stimulating employment. Using a competitive search model, we find that levered households suffer from a debt overhang problem that distorts their preferences, making them demand high wages. In general equilibrium, firms internalize these preferences and post high wages but few vacancies. This vacancy-posting effect implies that high household debt leads to high unemployment. Unemployed households default on their debt. In equilibrium, the level of household debt is inefficiently high due to a household-debt externality--banks fail to internalize the effect that household leverage has on household default probabilities via the vacancy-posting effect. As a result, household debt levels are inefficiently high. Our results suggest that a combina- tion of loan-to-value caps for households and capital requirements for banks can elevate employment and improve efficiency, providing an alternative to monetary policy for labor market intervention.

Suggested Citation

  • Giorgia Piacentino & Anjan Thakor & Jason Donaldson, 2015. "Bank Capital, Bank Credit and Unemployment," 2015 Meeting Papers 1403, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:1403
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    References listed on IDEAS

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    Cited by:

    1. Shai Bernstein & Timothy McQuade & Richard R. Townsend, 2017. "Do Household Wealth Shocks Affect Productivity? Evidence from Innovative Workers During the Great Recession," NBER Working Papers 24011, National Bureau of Economic Research, Inc.
    2. Brown, Jennifer & Matsa, David A., 2020. "Locked in by leverage: Job search during the housing crisis," Journal of Financial Economics, Elsevier, vol. 136(3), pages 623-648.
    3. Bednarzik, Robert W. & Kern, Andreas & Hisnanick, John J., 2017. "Displacement and Debt: The Role of Debt in Returning to Work in the Period Following the Great Recession," IZA Discussion Papers 10764, Institute of Labor Economics (IZA).

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