Financial development and instability: The role of the labour share

Elsa Orgiazzi ()

Research in Economics, 2008, vol. 62, issue 4, 215-236

Abstract: This paper examines the role of the labour share in creating instability in a small open economy. We assume that financial markets are imperfect so that entrepreneurs are credit constrained, and that this constraint is tighter for low levels of financial development. Aghion, Bacchetta and Banerjee [Aghion, P., Bacchetta, P., Banerjee, A., 2004. Financial development and the instability of open economies. Journal of Monetary Economics 51, 1077-1106] have shown that as the degree of financial development increases, output rises but instability appears for intermediate levels of financial development. Crucially, they assume that labour is paid before production takes place, and hence crises are solely due to the increased cost of debt repayment as firms accumulate capital. We show that under the more reasonable assumption that wages are paid at the end of the period, changes in the labour share also play a role in eroding profitability. Our analysis also predicts that financial crises are associated with substantial movements in the sharing of value added between capital and labour.

Keywords: Financial; liberalization; Volatility; Labour; share; Credit; constraint (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Financial development and instability: The role of the labour share (2008)
Working Paper: FINANCIAL DEVELOPMENT AND INSTABILITY:THE ROLE OF THE LABOUR SHARE (2007)
Working Paper: Financial Development and Instability: the Role of the Labour Share (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:62:y:2008:i:4:p:215-236

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