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

Iliopulos, Eleni; Langot, Francois; Sopraseuth, Thepthida

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

Eleni Iliopulos, Francois Langot and Thepthida Sopraseuth

PSE-Ecole d'économie de Paris (Postprint) from HAL

Abstract: We study the welfare costs of business cycles in a search and matching model with financial frictions. The model replicates the volatility on labor and financial markets. Business cycle costs are sizable. Indeed, the interactions between labor market and financial frictions magnify the impact of shocks via (i) a credit multiplier effect and (ii) an endogenous wage rigidity inherent to financial frictions. In addition, in a nonlinear framework, large welfare costs of fluctuations are explained by the high average unemployment and the low job finding rates with respect to their deterministic steady-state values.

Keywords: welfare; business cycle; financial friction; labor market search (search for similar items in EconPapers)
Date: 2019
Note: View the original document on HAL open archive server: https://hal.science/hal-03970668v1
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Published in Journal of Money, Credit and Banking, 2019, 51 (8), pp.2207-2237. ⟨10.1111/jmcb.12573⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:hal-03970668

DOI: 10.1111/jmcb.12573

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