Unemployment and Vacancy Dynamics with Imperfect Financial Markets

Carlos Carrillo-Tudela, Michael Graber and Klaus Wälde

No 9525, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper proposes a simple general equilibrium model with labour market frictions and an imperfect financial market. The aim of the paper is to analyse the transitional dynamics of unemployment and vacancies when financial constraints are in place. We model the financial sector as a monopolistically competitive banking sector that intermediates financial capital between firms. This structure implies a per period financial resource constraint which has a closed form solution and describes the transition path of unemployment and vacancies to their steady state values. We show that the transition path crucially depends on the degree of wage flexibility. When wages are bargained sequentially the transition path is always downward sloping. This implies unemployment and vacancies adjust in opposite directions as observed in the data. When calibrating the model to the Great Recession and its aftermath we find that the lack of an improvement in the financial sector's effectiveness to intermediate resources played a crucial role in the slow recovery of the labour market.

Keywords: financial markets; unemployment; job search (search for similar items in EconPapers)
JEL-codes: G10 J63 J64 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2015-11
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published - published in: Labour Economics, 2018, 50, 128-143

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Journal Article: Unemployment and vacancy dynamics with imperfect financial markets (2018)
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