Costly external finance and labor market dynamics

Sanjay Chugh

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 12, 2882-2912

Abstract: We study the role of agency frictions and costly external finance in cyclical labor market dynamics, with a focus on how credit-market frictions may amplify aggregate TFP shocks. The main result is that aggregate TFP shocks lead to large fluctuations of labor market quantities if the model is calibrated to the empirically observed countercyclicality of the finance premium. A financial accelerator mechanism thus amplifies labor market fluctuations by rendering rigidity in real wage dynamics. In contrast, if the finance premium is procyclical, which the model can be parameterized to accommodate, amplification is absent, and labor-market fluctuations display the Shimer (2005) puzzle.

Keywords: Credit frictions; Financial accelerator; Risk shocks; Labor search and matching; Volatility puzzle; Business cycle modeling (search for similar items in EconPapers)
JEL-codes: E32 E44 J63 J64 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:12:p:2882-2912

DOI: 10.1016/j.jedc.2013.08.005

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