Working Paper: NBER ID: w17389
Authors: Tommaso Monacelli; Vincenzo Quadrini; Antonella Trigari
Abstract: We study the importance of financial markets for (un)employment fluctuations in a model with searching and matching frictions where firms issue debt under limited enforcement. Higher debt allows employers to bargain lower wages which in turn increases the incentive to create jobs. The transmission mechanism of 'credit shocks' is fundamentally different from the typical credit channel and the model can explain why firms cut hiring after a credit contraction even if they have not shortage of funds for hiring workers. The theoretical predictions are consistent with the estimation of a structural VAR whose identifying restrictions are derived from the theoretical model.
Keywords: Financial Markets; Unemployment; Credit Shocks; Wage Bargaining; Labor Market Dynamics
JEL Codes: E24; E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit contractions (E51) | employment reductions (J63) |
| lower debt levels (H63) | workers' bargaining positions (J52) |
| workers' bargaining positions (J52) | higher wages (J39) |
| higher wages (J39) | reduced hiring (J63) |
| credit contractions (E51) | reduced hiring (J63) |
| lower debt levels (H63) | reduced hiring (J63) |