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Welfare Cost of Fluctuations when Labor Market Search Interacts with Financial Frictions

Eleni Iliopulos, Francois Langot () and Thepthida Sopraseuth ()

No 17-02, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: We study the welfare costs of business cycles in a search and matching model with financial frictions à la Kiyotaki & Moore (1997). We investigate the mechanisms that allow the model to replicate the volatility on labor and financial markets. Business cycle costs are sizable and asymmetric. This result is not trivial because the introduction of financial frictions does not per se always dampen welfare. Indeed, when credit costs are counter-cyclical and very responsive to productivity shocks, firms could benefit so much from the fall in hiring costs that the average job finding rate lies above its steady state value.

Keywords: Welfare; business cycle; financial friction; labor market search (search for similar items in EconPapers)
JEL-codes: E32 J64 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
Date: 2017
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Related works:
Working Paper: Welfare Cost of Fluctuations. When Labor Market Search Interacts with Financial Frictions (2018) Downloads
Working Paper: Welfare Cost of Fluctuations when Labor Market Search Interacts with Financial Frictions (2016) Downloads
Working Paper: Welfare Cost of Fluctuations: when Labor Market Search Interacts with Financial Frictions (2014) Downloads
Working Paper: Welfare Cost of Fluctuations: when Labor Market Search Interacts with Financial Frictions (2014) Downloads
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