Credit market imperfection,labor supply complementarity,and output volatility |
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| Institution: | 1. Department of Economic and Social Sciences, Catholic University, Piacenza I-29122, Italy;2. Department of Economics, School of Business, College of Staten Island and Graduate Center, City University of New York, United States;1. Institute of Economic Studies, Charles University, Opletalova 26, 110 00 Prague, Czech Republic;2. Institute of Information Theory and Automation, Czech Academy of Sciences, Pod Vodarenskou Vezi 4, 182 00 Prague, Czech Republic;1. Bank of Portugal, Economic Research Department, Av. Almirante Reis 71, 1150-012 Lisbon, Portugal;2. European Central Bank, Directorate General of Research, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany;3. Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy |
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| Abstract: | This paper argues that output volatility depends on the degree of credit market imperfection. In the early stages of financial development, agents are constrained in their borrowing ability. As a result, the individual savings, affected by the labor supply, play a dual role in the economy, having repercussions on the interest rate. On the one hand, high savings imply high investment, low marginal product of capital and thus low interest rate. On the other hand, high savings affect the agents' ability to run highly productive investment projects, which increases the interest rate. When the former effect is dominant, a dynamic complementarity between individual and aggregate labor supply arises. This leads to a local and global indeterminacy of equilibrium paths. If the borrowing constraint is relaxed, the complementarity between individual and aggregate labor supply decisions weakens, equilibrium becomes globally unique and the possibility of having aggregate fluctuations in output disappears. |
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