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Effects of Credit Supply on Unemployment and Inequality

Subhayu Bandyopadhyay (), Elias Dinopoulos () and Bulent Unel ()
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Elias Dinopoulos: University of Florida

No 2016-13, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The Great Recession, which was preceded by the financial crisis, resulted in higher unemployment and inequality. We propose a simple model where firms producing varieties face labor-market frictions and credit constraints. In the model, tighter credit leads to lower output, lower number of vacancies, and higher directed-search unemployment. Where workers are more productive at higher levels of firm output, lower credit supply increases firm capital intensity, raises inequality by increasing the rental of capital relative to the wage, and has an ambiguous effect on welfare. At initial high levels of labor share in total costs tighter credit lowers welfare. This pattern reverses during an expansionary phase caused by higher credit availability.

Keywords: Monopolistic competition; functional inequality; search unemployment; credit constraints. (search for similar items in EconPapers)
JEL-codes: D43 E24 G21 J31 J64 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2016-06-15
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DOI: 10.20955/wp.2016.013

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