Financial Market Imperfections, Labor Market Imperfections and Business Cycles

Lutz Georg Arnold ()

Scandinavian Journal of Economics, 2002, vol. 104, issue 1, pages 105-24

Abstract: A Greenwald-Stiglitz (1993) style rational expectations business cycle model is introduced in which uncorrelated productivity shocks or monetary shocks generate autocorrelated employment fluctuations due to financial constraints. The propagation mechanism is carefully modeled: because of capital market imperfections (only standard debt contracts are traded), firms' labor demand changes in response to changes in their balance-sheet position; because of labor market imperfections (efficiency wages), employment and unemployment fluctuate in response to shifts in labor demand. The virtue of the model is its simplicity. Despite the fact that unemployment is endogenous, the dynamic behavior of the model under rational expectations can be characterized analytically. Copyright 2002 by The editors of the Scandinavian Journal of Economics.

Date: 2002
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