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A Liquidity Crunch in an Endogenous Growth Model with Human Capital

Sergio Salas ()

No 2020-02, Working Papers from Escuela de Negocios y Economía, Pontificia Universidad Católica de Valparaíso

Abstract: There is by now reasonable evidence that supports the notion of a trend break in the US GDP since the Great Recession. To explain this phenomenon, I construct a version of the Lucas endogenous growth model, amplified with financial frictions and financial disruptions in the firms' sector. I then show how a transitory liquidity crunch is capable, at least qualitatively, of producing a similar pattern of a persistent downward shift in the GDP trend as one could infer happened in the US since 2008. The main mechanism by which such a result is found relies on workers' decisions on providing labor to firms versus accumulating human capital. I show that a transitory liquidity crunch reduces the demand of labor. Workers anticipating a phase of depressed wages make the decision of accumulating more human capital in the short run, thereby reducing labor supply to firms. In the long run, however, incentivized by a strong recovery, workers decrease human capital accumulation and increase labor supply. Under plausible parametrizaions of the model, this situation produces a net effect of a decrease in overall productivity that permanently reduces the trend at which the economy was growing prior to the crisis.

Keywords: endogenous growth; liquidity crises; human capital (search for similar items in EconPapers)
JEL-codes: E44 G01 O4 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-fdg, nep-gro and nep-mac
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