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)
Petrosky-Nadeau, Nicolas, and Etienne Wasmer.
"The Cyclical Volatility of Labor Markets under Frictional Financial Markets."
American Economic Journal: Macroeconomics,
Bargaining Theory; Matching Theory
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
Business Fluctuations; Cycles
Financial Markets and the Macroeconomy
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Labor Turnover; Vacancies; Layoffs