EconPapers    
Economics at your fingertips  
 

Financial development, unemployment volatility, and sectoral dynamics

Brendan Epstein () and Alan Finkelstein Shapiro ()

Journal of Economic Dynamics and Control, 2019, vol. 99, issue C, 82-102

Abstract: We document a negative and significant relationship between domestic financial development and unemployment volatility in developing and emerging economies (DEMEs) and the absence of such relationship in advanced economies (AEs). A business cycle labor search model with firm heterogeneity, collateral constraints, and interfirm input credit capital can quantitatively rationalize these facts. Greater financial development is associated with lower usage of input credit capital, greater bank credit, and greater capital accumulation, all of which make firms more resilient in the presence of financial shocks. Firms’ increased shock resiliency stabilizes employment decisions, ultimately leading to smoother unemployment fluctuations. Then, by establishing explicit linkages between firms, interfirm input credit acts as an important mechanism that fosters lower volatility across firms under greater financial development. As such, increases in financial development have a smaller impact in stabilizing unemployment in economies with higher average bank credit-GDP ratios and less input credit usage, which is the case of AEs, compared to economies with lower average bank-credit GDP ratios and more input credit usage, which is the case of DEMEs.

Keywords: Business cycles; Financial development; Financial frictions; Unemployment; Search frictions (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 F41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188918303919
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Financial Development, Unemployment Volatility, and Sectoral Dynamics (2018) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:99:y:2019:i:c:p:82-102

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-05-04
Handle: RePEc:eee:dyncon:v:99:y:2019:i:c:p:82-102