Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098678 | Journal of Economic Dynamics and Control | 2013 | 31 Pages |
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.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Sanjay K. Chugh,