Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7371428 | Labour Economics | 2018 | 34 Pages |
Abstract
This paper proposes a simple general equilibrium model with labour market frictions and an imperfect financial market. The aim of the paper is to analyse the transitional dynamics of unemployment and vacancies when financial constraints are in place. We model the financial sector as a monopolistically competitive banking sector that intermediates financial capital between firms. This structure implies a per period financial resource constraint which has a closed form solution and describes the transition path of unemployment and vacancies to their steady state values. We show that the transition path crucially depends on the degree of wage flexibility. When wages do not depend on the unemployment rate the transition path is always downward sloping. This implies unemployment and vacancies adjust in opposite directions as observed in the data. When calibrating the model to the Great Recession and its aftermath we find that the lack of an improvement in the financial sector's effectiveness to intermediate resources played a crucial role in the slow recovery of the labour market.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Carlos Carrillo-Tudela, Michael Graber, Klaus Waelde,