Economics at your fingertips  

Lending Relationships and Labor Market Dynamics

Alan Finkelstein Shapiro () and Maria Olivero
Additional contact information
Maria Olivero: Drexel University

No 1113, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: Standard labor search models face limitations in replicating the empirical volatility of unemployment and market tightness. We document a positive link between measures of credit-market distress and unemployment, and a negative link between measures of credit-market distress and labor force participation. We introduce monopolistic competition and persistent lending relationships in the banking system into an RBC search model with endogenous labor force participation. Amid aggregate productivity and financial shocks that replicate the empirical volatility of labor force participation and credit spreads, the model can replicate close to 90 percent of the volatility of unemployment and virtually all of the volatility in market tightness in the data. The interaction between endogenous participation in labor markets and long-lasting lending relationships plays a key role by providing a powerful amplification mechanism of financial shocks. We illustrate the policy relevance of accounting for labor force participation by analyzing the impact of countercyclical unemployment benefits and interest rate subsidies. We find that both are effective stabilization interventions.

Date: 2018
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) Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
Journal Article: Lending relationships and labor market dynamics (2020) Downloads
Working Paper: Lending Relationships and Labor Market Dynamics (2018) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in 2018 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

Page updated 2021-04-08
Handle: RePEc:red:sed018:1113