Employment and output effects of financial shocks

Hoang Khieu ()

Empirical Economics, 2018, vol. 55, issue 2, No 7, 519-550

Abstract: Abstract This paper develops a New Keynesian model featured with financial frictions in the form of an exogenous credit constraint to explore the employment and output effects of financial shocks. I show that the equity payout adjustment costs are crucial for the transmission mechanism of financial shocks. The model is estimated using the Bayesian methods and simulated using the observed exogenous shocks for two periods, 1954:III–1983:IV and 1984:I–2015:I. Overall, it is found that financial shocks can account for the observed dynamics of employment and output, especially the sharp decreases during the Great Recession 2007–2008. Additionally, the financial shock is the third and second biggest contributor to output and employment variations, respectively, in the earlier period, but it turns out to be the main source of employment and output fluctuations in the later period. I find that firms are faced higher equity payout adjustment costs in the period 1984:I–2015:I, which accounts for greater variations in the equity payouts in the period.

Keywords: Financial shocks; Exogenous credit constraint; Equity payout adjustment costs; New Keynesian (search for similar items in EconPapers)
JEL-codes: E12 E24 E32 E44 G35 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00181-017-1284-8

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