Costly external finance and labor market dynamics |
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| Authors: | Sanjay K Chugh |
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| Institution: | 1. Amsterdam School of Economics, University of Amsterdam, Valckenierstraat 65-67, 1018 XE Amsterdam, The Netherlands;2. Tinbergen Institute, Gustav Mahlerplein 117, 1082 MS Amsterdam, The Netherlands;1. School of Economics, University of East Anglia, United Kingdom;2. School of Economics, University of Kent, United Kingdom;1. Stanford University, Graduate School of Business, United States;2. NBER, United States;3. University of Pennsylvania, United States;4. CEPR, United Kingdom;5. University of Chicago, Booth School of Business, United States;6. Duke University, United States;7. Federal Reserve Bank of Atlanta, United States;8. BBVA Research, Spain;1. CNRS (UMR 7176), Ecole Polytechnique, France;2. Banque de France, France;3. Faculty of Economics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DD, United Kingdom;4. CEPR, United Kingdom |
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| Abstract: | We study the role of agency frictions and costly external finance in cyclical labor market dynamics, with a focus on how credit-market frictions may amplify aggregate TFP shocks. The main result is that aggregate TFP shocks lead to large fluctuations of labor market quantities if the model is calibrated to the empirically observed countercyclicality of the finance premium. A financial accelerator mechanism thus amplifies labor market fluctuations by rendering rigidity in real wage dynamics. In contrast, if the finance premium is procyclical, which the model can be parameterized to accommodate, amplification is absent, and labor-market fluctuations display the Shimer (2005) puzzle. |
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| Keywords: | Credit frictions Financial accelerator Risk shocks Labor search and matching Volatility puzzle Business cycle modeling |
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