Anatomy of a Credit Crunch: From Capital to Labor Markets

Francisco Buera, Roberto Fattal-Jaef and Yongseok Shin
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Roberto Fattal-Jaef: World Bank
Authors registered in the RePEc Author Service: Roberto N. Fattal Jaef

Review of Economic Dynamics, 2015, vol. 18, issue 1, 101-117

Abstract: Why are financial crises associated with a sustained rise in unemployment? We develop a tractable model with frictions in both credit and labor markets to study the aggregate andmicro-level implications of a credit crunch---i.e., a sudden tightening of collateral constraints. When we simulate a credit crunch calibrated to match the observed decline in the ratio of debt to non-financial assets of the United States business sector following the 2007-8 crisis, our model generates a sharp decline in output---explained by a drop in aggregate total factor productivity and investment---and a protracted increase in unemployment. We then explore the micro-level impact by tracking the employment dynamics for firms of different sizes and ages. The credit crunch causes a much larger reduction in the net employment growth rate of small, young establishments relative to that of large, old producers, consistent with the recent empirical findings in the literature. (Copyright: Elsevier)

Keywords: Financial frictions; Unemployment (search for similar items in EconPapers)
JEL-codes: E24 E44 L25 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (77)

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DOI: 10.1016/j.red.2014.11.001

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