The cyclical volatility of labor markets under frictional financial markets

Nicolas N. Petrosky-Nadeau, Etienne Wasmer

    Research output: Contribution to journalArticle

    Abstract

    We provide a dynamic extension of an economy with search on credit and labor markets (Wasmer and Weil 2004). Financial frictions create volatility. They add an additional, almost acyclical, entry cost to procyclical job creation costs, thus increasing the elasticity of labormarket tightness to productivity shocks by a factor of five to eight, compared to a matching economy with perfect financial markets. We characterize a dynamic financial multiplier that is increasing in total financial costs and minimized under a credit market Hosios- Pissarides rule. Financial frictions are an element of thesolution to the volatility puzzle.

    Original languageEnglish (US)
    Pages (from-to)193-221
    Number of pages29
    JournalAmerican Economic Journal: Macroeconomics
    Volume5
    Issue number1
    DOIs
    StatePublished - Jan 1 2013

    Fingerprint

    Labour market
    Financial frictions
    Costs
    Credit markets
    Financial markets
    Elasticity
    Factors
    Multiplier
    Productivity shocks
    Entry costs
    Job creation

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

    Cite this

    The cyclical volatility of labor markets under frictional financial markets. / Petrosky-Nadeau, Nicolas N.; Wasmer, Etienne.

    In: American Economic Journal: Macroeconomics, Vol. 5, No. 1, 01.01.2013, p. 193-221.

    Research output: Contribution to journalArticle

    Petrosky-Nadeau, Nicolas N. ; Wasmer, Etienne. / The cyclical volatility of labor markets under frictional financial markets. In: American Economic Journal: Macroeconomics. 2013 ; Vol. 5, No. 1. pp. 193-221.
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