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The effect of credit shocks in the context of labor market frictions

Shushu Liao

Journal of Banking & Finance, 2021, vol. 125, issue C

Abstract: The recent financial crisis was associated with a large and prolonged deterioration of the credit supply. I build and calibrate a structural model to explore the impact of credit-supply shocks on firm behavior in the context of labor market frictions. I discover that (i) a negative shock to the credit supply can lead to a protracted depression in business activities when firms have a steady level of productivity (demand) and that (ii) a reduction of labor adjustment costs can improve investment and mitigate the negative impact of credit-supply shocks, especially for firms with a high level of productivity. I also empirically corroborate that a lower labor unionization rate can mitigate the negative impact of supply shocks on high-demand firms during a crisis.

Keywords: Financial crisis; Labor adjustment costs; Credit-supply shocks; Structural model (search for similar items in EconPapers)
JEL-codes: G31 G32 G38 J52 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jbankfin.2021.106091

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Handle: RePEc:eee:jbfina:v:125:y:2021:i:c:s0378426621000492