Credit Condition, Inflation and Unemployment

Chao Gu, Janet Hua Jiang and Liang Wang ()
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Liang Wang: University of Hawaii, https://sites.google.com/view/lwangecon/home

No 2314, Working Papers from Department of Economics, University of Missouri

Abstract: We study the effects of the firm's credit condition on labor market performance and the relationship between expected inflation and unemployment in a new monetarist model. Better credit condition improves labor market outcomes as firms save on their cash financing cost, improve profitability, and create more vacancies. Inflation affects unemployment through two opposing channels. First, inflation increases the firm's financing cost, which discourages job creation and increases unemployment. Second, inflation lowers wages through bargaining because unemployed workers more heavily rely on cash transactions and suffer more from inflation compared to employed workers. This encourages job creation. The overall effect of inflation on employment depends on the firm's credit condition. We calibrate the model to match U.S. data. The calibrated model suggests a downward-sloping Phillips curve with flexible wages. Finally, we find that improvement in firm credit conditions is consistent with the flattening of the Phillips curve.

Keywords: toxic assets; market freezes; negative returns; liquidity (search for similar items in EconPapers)
JEL-codes: E24 E31 E44 E51 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2023-12-16
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-lab, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:umc:wpaper:2314

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