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A Liquidity Crunch in an Endogenous Growth Model with Human Capital

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  • Sergio Salas

Abstract

There is by now reasonable evidence that supports the notion of a trend break in the US GDP since the Great Recession. To explain this phenomenon, I construct a version of the Lucas endogenous growth model, amplified with financial frictions and financial disruptions in the firms' sector. I then show how a transitory liquidity crunch is capable, at least qualitatively, of producing a similar pattern of a persistent downward shift in the GDP trend as one could infer happened in the US since 2008. The main mechanism by which such a result is found relies on workers' decisions on providing labor to firms versus accumulating human capital. I show that a transitory liquidity crunch reduces the demand of labor. Workers anticipating a phase of depressed wages make the decision of accumulating more human capital in the short run, thereby reducing labor supply to firms. In the long run, however, incentivized by a strong recovery, workers decrease human capital accumulation and increase labor supply. Under plausible parametrizaions of the model, this situation produces a net effect of a decrease in overall productivity that permanently reduces the trend at which the economy was growing prior to the crisis.

Suggested Citation

  • Sergio Salas, 2020. "A Liquidity Crunch in an Endogenous Growth Model with Human Capital," Working Papers 2020-02, Escuela de Negocios y Economía, Pontificia Universidad Católica de Valparaíso.
  • Handle: RePEc:ucv:wpaper:2020-02
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    More about this item

    Keywords

    endogenous growth; liquidity crises; human capital;
    All these keywords.

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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