The Cyclical Volatility of Labor Markets Under Frictional Financial Markets

By Nicolas Petrosky-Nadeau, Étienne Wasmer. Social Science Research Network, 2010

153 citations recorded by the source corpus.

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 labor market 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 the solution to the volatility puzzle. (JEL C78, E24, E32, E44, G21, J63)

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/1655f1ef3a500acd8ef45adf16229e0b697943f5

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Citations in the corpus

Solving the Diamond–Mortensen–Pissarides model accurately (2017, background): “Finally, Petrosky-Nadeau and Wasmer (2013) use financial frictions to increase labor market volatilities. marginal costs of hiring (inversely related to the vacancy filling rate) hardly decline, exacerbating the impact of falling profits to stifle job creation.”
The Fundamental Surplus (2017, background): “For example, a decomposition of Petrosky-Nadeau and Wasmer (2013) assigns a multiplicative role to a financial accelerator in the model of Wasmer and Weil (2004).”