Endogeneous Labor Supply, Borrowing Constraint and Credit Cycles

Anna Agliari () and George Vachadze

No dises1059, DISCE - Quaderni del Dipartimento di Scienze Economiche e Sociali from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: We investigate Matsuyama's (Econometrica, 72, pp. 853-84, 2004) model modi- fied only to include endogenous and forward looking labor supply decision. Young agents supply one unit of labor endowment elastically to a competitive labor market. While, old agents of ex-ante identical individuals are divided in equi- librium into depositors and entrepreneurs. Depositors lend funds in the form of interest bearing loans, while entrepreneurs borrow funds in the competitive credit market. We emphasize the interaction between credit and labor markets and show the possibility of occurrence of multiple steady states, local and global indeterminacy, and endogenous fluctuations. When young agents become optimistic about the future deposit rate then they decide to work harder and invest more. Countercyclical borrowing constraint will help agents to fulfill their initial optimistic expectations, because the next period credit volume and deposit rate can increase simultaneously. By conducting global bifurcation analysis, we show that credit cycles can occur through a self- fulfilling expectation mechanism. History-versus-expectations considerations can exist and escape from underdevelopment as well as fall into poverty can to be a self-fulfilling prophecy.

Keywords: Borrowing constraint; Credit cycles; Elastic labor supply; Endogenous fluctuations; Self-fulfilling expectations. (search for similar items in EconPapers)
JEL-codes: C62 E32 E44 J22 O11 O16 O41 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2010-01
New Economics Papers: this item is included in nep-dge and nep-lab
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Citations: View citations in EconPapers (1)

Published in Review of Economics, February 2010, pages nn1-nn2

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